Archive for December, 2013

Extend those unemployment benefits already

29 December 2013

Yesterday 1.3 million jobless Americans lost their unemployment benefits, thanks to Congress’s unwillingness or inability to extend long-term unemployment insurance funding. The number could rise to 4.9 million within the next year.

Extending the unemployment benefits is a no-brainer at a time when long-term unemployment rates are still higher than in any previous postwar recession, when there are three unemployed people for every job vacancy, and the money paid out in unemployment benefits quickly gets spent, thereby boosting the still-weak economy. Support for the extension is strong among the public, liberal public policy groups, and even some prominent conservatives. But Congressional Republicans continue to block it.

I’ve heard four arguments against extending unemployment benefits beyond the current 26-week threshold.

1. It encourages idleness.

Econ 101 does indeed tell us that, other things equal, anything you do to make people’s unemployment experience more pleasant, like giving them cash, reduces their incentive to take a job. Which is which unemployment benefits normally expire after 26 weeks. But these are not normal times, not with the long-term unemployment rate at 2.6%, a higher level than in any previous recession or recovery since WW2. Yet in all of those other recessions, whenever long-term unemployment got anywhere near this high, unemployment benefits were extended. If you cut off long-term unemployment benefits, some of the long-term jobless would find jobs, but the vast majority would not, unless a million or so vacancies could somehow materialize too and employers suddenly developed a preference for long-time jobless applicants. (Currently employers have a strong preference for applicants who are not unemployed, followed by those who have only been out of work for a short spell.)

A recent empirical study published by the Brookings Institution estimates that in the absence of extended unemployment benefits the unemployment rate would be about 0.1 – 0.5% lower, which we will note that is a small fraction of the current 2.6% long-term jobless rate. And the author notes that about half of that improvement would come not from the long-term unemployed rejoining the work force but from currently employed people sticking with their jobs because of the worsening of the alternative. So the estimate becomes just 0.05% – 0.25% of the long-term jobless who would rejoin the work force if benefits were cut off. Do the math, and the estimated ratio of still-unemployed people without benefits to newly re-employed is in the range of 9-to-1 to 51-to-1. Rather high pain-to-gain ratios.

2. It hurts the long-term unemployed by lengthening their term of unemployment even further, making it even harder for them to find a job.

While it’s true that employers are reluctant to hire the long-term unemployed, this argument makes the same false assumption as in (1.), namely that the jobs are out there and the long-term unemployed just aren’t looking hard enough or aren’t willing to take them. A 3-to-1 unemployed-to-vacancies ratio should give the lie to that. And the ratio of long-term unemployed to vacancies that long-term unemployed people have a realistic shot at is surely much higher.

3. It’s no longer needed, what with the economy’s recent improvement. Real GDP grew 4.1% in the last quarter, and the unemployment rate is down to 7%. 

Those numbers have dominated the recent headlines, but they’re irrelevant here. Thanks to growing productivity, real GDP is now higher than it was before the recession, but with two million fewer workers. And as I seem to write in every post, the standard unemployment rate is largely irrelevant, when millions of jobless Americans have given up looking for work, millions more have left or avoided the labor force entirely, and other millions are involuntarily working part-time because they can’t find full-time work. More relevant numbers are the 13.2% comprehensive (U-6) unemployment rate; the 58.6% employment/population ratio, which has not improved since the depth of the recession; and, of course, the 2.6% rate of long-term (27+ weeks) unemployment as a percentage of the labor force. The economy’s recent good news has largely bypassed the long-term unemployed. The best that can be said about the long-term unemployment rate is that it’s been coming down, from about 4.3% four years ago, but even then it’s still as high as at any point since the 1940s.

4. It costs money.

This is the silliest objection of all, since the amount in question ($24 billion next year) is not only less than 0.7% of the budget, but a lot of the money would be returned to the federal, state, and local government in the form of tax revenues as the unemployed spend that income. Unemployed people can be counted on to spend nearly all of their benefits, especially seeing as the benefits are small compared to their previous income; the benefits level varies by state, with most states in the range of 25-45%. While unemployment benefits cost money, so do food, clothing, shelter, utilities, and all the other necessities and commitments that people have. They’re called benefits because they provide very tangible benefits to the people who receive them, far in excess of their cost to the taxpayers. (And it should be noted that the unemployed already paid into the system when they were working and will do so again if and when they return to work.)

Whatever your opinion on this issue, there should be no doubting that long-term unemployment is one of the central problems of our time. The long-term unemployed are almost 40% of the total unemployed, which is roughly twice as high as in any previous postwar recession (see graph).

L-t-unempl-as-pct-of-total-unempl

While extended unemployment benefits do more good than harm, what we need even more are jobs. Government job creation is a non-starter in Congress and apparently with the public as well, so once again we are left with the Micawber-like hope that something will turn up in the private sector.

 

Special no-prize to the first person who can connect that last line to this video of Keith Richards:

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Six years of pain

27 December 2013

Six years ago this month, the US economy officially peaked. We didn’t know it till a year later when NBER made the call, but the labor market has never been the same. The unemployment rate crept upward through the summer of 2008, before exploding that fall and reaching double digits the next fall (up from 4.5% in the first half of 2007), several months after the recession officially ended in June 2009. People call that devastating eighteen months the Great Recession, but I prefer to call this whole six years (and counting) the Little Depression because the economy — and the labor market in particular — remains so depressed.

Consider the change from December 2007 to now (or rather to November 2013, the most recent month we have data for):

The adult (age 16+ population) grew by 13,411,000.

Employment shrunk by 1,887,000.

Unemployment rose by 3,262,000.

“Not in labor force” (neither employed nor actively looking for a job) rose by 12,035,000.*

(*And no, most of that does not come from old people retiring. The drop in the employment/population ratio is 4.1 percentage points if you include all of the adult population, and 3.8 percentage points if you include only those in the 25-54 age range.)

Sometimes the numbers really do speak for themselves.

Declare victory and taper?

19 December 2013

Wednesday the Federal Open Market Committee did the expected, by announcing a “tapering” off of its $85 billion monthly purchases of long-term Treasury bonds and mortgage-backed securities (MBS’s), citing “the cumulative progress toward maximum employment.” Thursday the BLS announced that weekly jobless claims rose to their highest level in nine months. Ouch.

Granted, the spike in jobless claims might not mean much, as they can be volatile, especially around holiday time, and indeed the four-week average of jobless claims “only” rose to its highest level in one month. Even so, the “progress toward maximum employment” has been glacial, if it can be called progress at all. The media have trumpeted the good news in the Bureau of Labor Statistics’ (BLS) latest employment report, which found that the standard unemployment rate fell from 7.3% to 7.0%, its lowest level in five years, and employers added 203,000 jobs. That’s fine, but it’s also just one month. Let’s look at the past year, from Nov 2012 to Nov 2013, using the Households Survey numbers in the employment report.

In the past year the adult US population grew by almost 2.4 million. The number of people “Not in labor force” (neither employed nor actively looking for a job) also grew by slightly more than 2.4 million. The total US labor force actually fell by 25,000, and the employment-to-population ratio also fell slightly, from 58.7% to 58.6%. While it’s good news that total employment rose by 1.1 million and unemployment (and people who say they currently want a job) fell by 1.1. million, the biggest growth sector by far is “Not in labor force,” again with 2.4 million. The employment/population ratio is exactly the same now as it was four years ago, in Nov 2009. This is not progress.

I wouldn’t be an economist if I never said “On the other hand,” however, and on that hand we have the “Establishments Survey” that furnishes the other half of the BLS report. The unemployment and employment/population rates come from the Households Survey; the payroll numbers (e.g., 203,000 jobs added) come from the Establishments Survey. Average monthly payroll growth for the past year was 191,000 jobs, or more than double the puny job growth in the Households Survey (1.1 million / 12 months = 92,000 jobs per month).

What would victory look like on the jobs front? I would say 5% unemployment, which the economy had for 35 straight months in the mid-2000s, or less. (And I would want the reduction to come from job growth and not from people leaving the labor force.) How far are we from 5% unemployment? The Atlanta Fed’s handy jobs calculator has the answer. If the economy keeps on adding 191,000 jobs per month, we return to 5% unemployment in three years. If it adds just 92,000 jobs per month, we never get back to 5% unemployment, unless the labor force does a whole lot of shrinking. If we split the difference and figure the correct figure is right in the middle at 141,500, then we get there in seven and a half years, in early 2021.

Back to the taper. The labor data suggest a need for more, not less, monetary stimulus, but how much stimulus were those emergency bond-buying programs providing? All we know is that they created $85 billion in new bank reserves each month. For the programs to work, banks needed to loan out those reserves. Not much of that has been happening:

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Real estate and consumer loans are flat. Business loans are rising but not fast enough to return to their trend level. (Which, by the way, is true of just about every other macro aggregate — household consumption, business investment, etc.) Just as the fastest-growing occupational category is Not In Labor Force (NILF?), the most dramatic growth on bank balance sheets is excess reserves:

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This is what pushing on a string looks like. Maybe the taper is causing the volume of loans, however meager, to be larger than it otherwise would be, but it’s hard to believe it’s making a world of difference. An oft-cited study published by the Brookings Institution found that the MBS purchases had managed to lower mortgage rates but that the Treasury bond purchases had not lowered long-term Treasury rates. And lowering long-term interest rates, as the bond buying is supposed to do, is only part of the game. Banks have to make loans at those rates. As we saw in the first graph, not nearly enough of that is happening. And the economy probably has to improve a lot more before banks are eager to lend and people are eager to borrow. Catch-22, yes.

All in all, the slight taper, from $85 billion to $75 billion a month, is unlikely to do noticeable harm, since the bond-buying program doesn’t seem to be making a big difference in the first place. Declaring victory, or even declaring substantial progress, on the employment front is foolish, but tapering is another story. Alternative policies, like ending the payment of interest (currently 0.25%) on bank reserves, might be preferable to the long-term bond-buying, but it’s clear from the last few years that Fed cannot be the main driver on the road to recovery. Congress could, through fiscal policy, but won’t, preferring austerity to stimulus, when it isn’t shutting down the government entirely. It looks like we’ll have to cross our fingers and hope for the “natural forces of recovery” to work their magic.