Archive for December, 2011

Good news and bad news

15 December 2011

The good: Initial jobless claims last week were at their lowest level in three and a half years, back to May 2008, before the financial panic hit and before the recession had been declared. The four-week average is at its lowest level since July 2008. Last week’s number still looks high (366,000), but keep in mind that even in good times the number is usually over 300,000 — layoffs are a regular feature of the U.S. labor market. It should also be noted that unlike the recent drop in the official unemployment rate (from 9.0% to 8.6%), this improvement is not mostly an artifact of unemployment people giving up on their job search and dropping out of the labor force. These are initial claims for unemployment insurance, by people who previously were working. So if this number is down, then either there were fewer layoffs or (less likely, I’d think) fewer laid-off workers bothered to apply for unemployment insurance.

The bad: Nearly half of Americans (48%) are either poor or near-poor, according to new Census data. That includes 49 million who are classified as living in poverty, plus 97 million who are classified as “near poor,” defined as having an income between 100 and 200 percent of the poverty line. Once upon a time many people would dismiss Census poverty data by noting that they failed to include government welfare spending and other anti-poverty tax and transfer policies, and also failed to adjust for the huge variation in the cost of living in different regions of the nation. But the new figures reflect the recently revised Census methodology, which answers those objections. One might also object that the low-income threshold is actually quite high — $45,000 for a family of four — but I would guess that the objectors have not tried to support a family of four on that amount lately. The AP article quotes Robert Rector* of the Heritage Foundation with the old conservative argument that many of these people have TV’s, cars, and houses, ergo they’re not really materially deprived, but I think he’s missing a couple things:

  • Poverty is a relative measure as well as an absolute measure. Yes, $45,000 would have been opulence for, say, a family in colonial America (which apparently had the highest standard of living in the world at the time). But colonial families grew their own food, spun their own cloth, and were otherwise generally self-sufficient. Also, yesterday’s luxuries often become today’s necessities. For example, two decades ago I spent about $25 a month to stay connected, in the form of basic landline service. Today, staying connected costs me about $350 a month, for cable TV and Internet, cellphone, etc. You can live without all those things, but when everyone around you has them, you will know deprivation. Just because it’s a social construct doesn’t mean it’s bogus.
  • The burden of consumer debt: Entering the recession, consumer debt was at an all-time high relative to income. Household debt service payments averaged 14% of income and about 28% for renters. Since the recession began, many households are obviously much poorer and finding it much harder to make those payments. Many have, of course, not merely fallen behind but lost their houses and other collateral. The overall debt-service-to-income statistics show that households are successfully deleveraging,with the number down to 11%, but the average surely hides a lot of variation. I expect debt is weighing very, very heavily on most near-poor households — those that still have their houses, that is.

When members of a household are unemployed or underemployed, they are probably just barely keeping up with the living standards of the community or even their own living standards of a couple months or years ago. It’s gotta be painful. Pundits and politicians ignore that reality at their own peril.

(*Also the same person from whom I first heard the suggestion that government policy on poverty should be based on the words of the apostle Paul in 2 Thessalonians 3:10: “That if any would not work, neither should he eat.” I last heard it from Michele Bachmann.)

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Euromad

3 December 2011

The euro has always struck me as Germany’s final success at dominating Europe. What two world wars couldn’t accomplish, the Bundesbank could. By the 1990s, Germany looked like such a model of economic rectitude that eleven of its neighbors and near-neighbors (now 16, not counting principalities) were happy to formally link their currencies to Germany, their monetary policies to a European Central Bank that was a continental version of the Bundesbank, and their fiscal policies to a treaty that said deficits and debt should be under 3% and 60% of GDP (which seemed to reflect German fiscal conservatism).

Fiscal conservatism hasn’t fared well since recession began in late 2007. Even without the countercyclical tax cuts and spending increases that many governments enacted, falling GDP has caused most countries’ debt/GDP ratios to skyrocket. Even Germany’s is now over 80%. (And contrary to conventional wisdom, it’s just not true that the European economies now facing debt crises, with the exception of Greece, were running up huge deficits and debt prior to the recession; c.f. Krugman and Dean Baker.)

The news for much of this year has been of sovereign debt crises in Greece and the other “PIIGS” countries (from the “BAFFLING PIGS” mnemonic for the first 12 euro members), Portugal, Ireland, Italy, and Spain. But the most shocking economic news for me this year was the recent report that they held a German bond auction and “nobody” came. Not really nobody, but the German government was only able sell three-fifths of the “bunds” they intended to sell. To be sure, they’d have sold more if they’d been willing to accept lower bids; these bonds were supposed to pay just 2% interest, and that’s about where the yields ended up. The linked article quotes some observers who say the weak auction was due to investor concerns that Germany might be left holding the bag for PIIGS and other euro countries that can’t pay their debts. Others have said it was mostly about currency risk, i.e., the risk that the euro might massively depreciate or even crack up over the 1o-year lifetime of the bonds.

Could a euro crack-up happen? Some experts think it actually will happen, perhaps soon. Peter Boone & Simon Johnson:

‘The path of the euro zone is becoming clear. As conditions in Europe worsen, there will be fewer euro-denominated assets that investors can safely buy. Bank runs and large-scale capital flight out of Europe are likely.

‘Devaluation can help growth but the associated inflation hurts many people and the debt restructurings, if not handled properly, could be immensely disruptive. Some nations will need to leave the euro zone. There is no painless solution.

‘Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.’

At least the run on the euro is off to a slow start. The euro has had a rough November, but its decline against the dollar was only four and a half cents, or about a penny per week. The euro’s price against the dollar is still higher now than it was in most of 2005-2006.

As has been noted, euro membership has arguably gone from a privilege to a bane for these weaker countries, and possibly for all of them. Before the recession, their governments and firms could borrow cheaply on the international market, as the relatively stable euro provided insurance for the lenders, against getting repaid in devalued currency. But now euro membership takes away two key stabilization tools for them: monetary stimulus from their own central bank, and currency adjustment (a devaluation could help GDP through increased net exports).

The messy euro situation looks like the big wild card for the U.S. economy. (Here the conventional wisdom is actually correct, in my view.) Although the blow to U.S. exports from a double-dip European recession could theoretically be offset by more expansionary fiscal policy, the political prospects for additional stimulus have been dim for a long time. Things would have to get a whole lot worse here before any new stimulus could get past the Republicans in Congress, and maybe not even then.

Idle times

2 December 2011

Today’s new Bureau of Labor Statistics report reveals the instant cure for unemployment: Stop looking for work. I say that not as advice or to be callous, just to explain how it is that November’s meager job growth could coexist with a pretty sizable drop in the unemployment rate, from 9.0% to 8.6%.

Technically, the precise reason is that the low number of jobs added, 120,000 (which is well under the 210,000 needed to restore 5% unemployment in eight years) comes from the BLS’s survey of companies (the “establishment survey”), whereas the 8.6% number comes from its separate survey of households. But even in the household survey, the basic story is the same. The longstanding economic definition of unemployed is not merely “not employed” but “not employed yet actively looking for work.” And it looks like the bulk of the reduction in unemployment was from people who stopped looking.

In the household sample, total unemployment fell by 594,000, which looks great, except that employment grew by less than half that (278,000). “Not in the labor force” (i.e., not working and not looking) grew by much more (487,000). The labor force itself (employed plus unemployed) shrank by 315,000. It’s hard to blame people for giving up looking for work when there are currently 4.2 times as many unemployed as there are job vacancies. (The number was 1.8 when the recession began three years ago.)

Rather than focus on the official unemployment rate or broader measures like the U-6 unemployment rate (now 15.6%; includes discouraged job-seekers and involuntary part-timers), I prefer to focus on the employment-to-population ratio, which is a simpler measure that avoids messy distinctions (e.g., actively vs. passively looking for work vs. not looking at all but might take a job if offered). The employment-to-population ratio has hardly changed at all since September 2009, fluctuating narrowly around its current value of 58.5%. (By comparison, it was 62.0% at the worst of the 2001 recession hangover.)

One could wax metaphysical about work as a bourgeois construct and argue that people are finding spiritually rewarding alternatives to work, but that doesn’t seem to be the case for all that many people here. The BLS report shows that 6,595,000 adult Americans are currently not working and not looking but want to work now. That number (seasonally adjusted) has never been larger — not even at the trough of the recession in mid-2009 and not even when the unemployment rate was over 10%.

If the labor force keeps on shrinking, the official unemployment rate could fall fast, but that’s probably not how we want to get there.

UPDATE 3 DEC. 2011: Brad DeLong does the number crunching I was too lazy to do and produces a specific breakdown of how much of the unemployment rate decline came from labor force shrinkage (25 basis points, or 0.25 percentage points) and how much came from employment growth (15 basis points). So if nobody had left the labor force, the unemployment rate would have fallen to 8.85%.

Tired of defending it

1 December 2011

Chris Rock has a great bit where he says he still loves rap music but is tired of defending it, the misogynistic lyrics in particular. I’ve been a longtime advocate of the Federal Reserve and continue to defend it against various conspiracy-mongers, but I really can’t defend this at all: “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress.”

The story is not from a conspiracy peddler or a grandstanding politician, but from Bloomberg News, and actually involved investigative reporting. The $13 billion figure is the profit the banks earned from subsidized low-interest loans, etc. The Fed’s total commitment, including loan rollovers, guarantees, and lending limits, was an eye-popping $7.7 trillion. Now, when I first heard a similar figure presented by Congressman Bernie Sanders a few months ago, it looked like a distortion, because it included rollover loans (if I loan you $100 and you pay me back a month later and get a new loan and so on for 12 months, have I loaned you $100 or $1200?) and the total assets on the Fed’s balance sheet have never been much larger than $2 – 2.5 trillion, with a maximum of $1.5 trillion that could be loans to banks. But the non-rollover figures are still staggering. The banks “required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day.”

Other areas for concern (or outrage, take your pick):

  • These loans covered a much longer period that one might think. They were greatest at the height of the fall 2008 crisis, but they began in August 2007 and lasted until April 2010. Was such a massive amount of subsidized lending justified this whole time?
  • The identities of the banks were kept secret, until Bloomberg obtained them via a Freedom of Information Act request. Now, the Fed’s usual lender-of-last-resort apparatus, the discount window, is supposed to keep borrowers’ identities secret, but traditionally there was at least supposed to be some stigma attached to discount loans, so that banks didn’t take advantage of the Fed’s low interest rates by borrowing too much. The Fed wouldn’t out them, but it might audit them. While there is a rationale for keeping the borrowers’ names secret — you don’t want to spark a panic by signaling that these banks are in trouble — surely this secretiveness should have some limits? Last year’s Dodd-Frank financial reform bill requires disclosure of discount loans after a two-year lag. This seems modest to me, but tellingly, Fed officials are wringing their hands and saying this will destroy discount lending.
  • What kind of lender of last resort charges the lowest interest rate in town? The interest rates on these loans got as low as 0.01%. This is a huge subsidy to banks that supposedly can’t get loans anyplace else. A few years ago the Fed reset its discount rate (the rate it charges its borrowers) a notch above the federal funds rate (the rate banks charge each other), presumably so that banks wouldn’t take advantage of the Fed’s low rate. Yet the big banks got to borrow at interest rates below that, and below what anyone else was offering.
  • The loans appear to have been completely unconditional. This could maybe be justified at the peak of the 2008 crisis, when it seemed like fast action was needed, but before and after too? The Federal government’s TARP loans to banks (which, at $700 billion, now appear puny by comparison) were basically unconditional but at least attempted to impose some restrictions on banker bonuses. With the benefit of hindsight and time, more meaningful restrictions, like radically changing the pay structure so as to discourage taking wild risks with other people’s and taxpayers’ money, and limits on leverage, could be devised, and the Fed wouldn’t have worry about getting them through Congress.

I still favor an independent central bank, with minimal political meddling. But these loans don’t look like the work of an independent entity at all. They scream “regulatory capture” by big banks. Gigantic, secret, and unconditional subsidies like these are a recipe for moral hazard that could make the next financial crisis one of those sequels that’s bigger, costlier, and suckier than the original.

Audit the Fed? Yeah, why not.

UPDATE, 2 DEC. 2011: Felix Salmon and Brad DeLong teach me that my point that the lender of last resort should not have the lowest rates in town was made a long, long time ago, by Walter Bagehot: “Lend freely, but at a penalty rate.” DeLong writes:

“Without the Fed and the Treasury, the shareholders of every single money-center bank and shadow bank in the United States would have gone bust.”