The Employment Report, and the Need for Maintaining Stimulus

The Employment Report in Brief

 

The WSJ RTE post title says it pretty clearly: Economists React: Jobs Report an ‘Unmitigated Disaster’. My two observations are:

 

 

  • Overall employment is being reduced by continuous reductions in government (primarily state and local) employment. Private sector employment growth was 57,000.
  • Hours continue to rise faster than employment in the private sector.

emprep1.gif

Figure 1: Month on month change in government employment, ex.-Census (blue) and total private industry (red), in thousands, seasonally adjusted. Source: BLS via St. Louis Fed FREDII.

emprep2.gif

Figure 2: Log private sector employment (blue) and log aggregate weekly hours (red), both normalized to 2009M06, seasonally adjusted. Source: BLS via St. Louis Fed FREDII, and author’s calculations.

More from CR. With the economy clearly in a weak patch, one has to think very carefully about how a fiscal consolidation package is crafted.

 

Thinking Carefully about Fiscal Consolidation

 

Various international organizations have weighed in on the need for fiscal consolidation in the US, while at the same time arguing against an overly hasty withdrawal of stimulus (both fiscal and monetary). For instance, in its most recent concluding statement to the Article IV mission on the US (June 20), the IMF wrote:

… Fiscal policy consolidation needs to proceed as debt dynamics are unsustainable and losing fiscal credibility would be extremely damaging. However, the pace and composition of adjustment should be attuned to the cycle, within a politically-backed strategy that raises medium-term revenues and addresses long-term expenditure pressures. …

In fact, with government spending on goods and services shrinking, stimulus is already being withdrawn.
emprep3.gif

Figure 3: Real GDP growth (blue bar), spending growth attributable to total government (red bar), and to Federal government (green bar), all in percentage points, SAAR. NBER defined recession dates shaded gray. Source: BEA, 2011Q3 3rd release, and NBER.

Macroeconomic Advisers has just released their of what a fiscal consolidation along the lines of Simpson-Bowles would imply.

Assuming current fiscal policies remain in force, our economic model suggests
that interest rates will rise considerably over the next decade, with the yield on the
10-year Treasury note reaching nearly 9% by 2021.

. . .
We estimated the effects of a fiscal contraction that is patterned after the so-called
Bowles-Simpson plan and that averts this dire scenario.

 

  • The plan would pare more than $4 trillion from the federal debt by 2021 relative to
    current policy.
  • Roughly two thirds of this contraction is from spending cuts, the rest from tax
    increases.

 
For a given path of long-dated yields, the macroeconomic effects of the fiscal
contraction are sizable.

 

  • “Fiscal drag” would reduce real GDP growth by 0.4 to 0.5 percentage point per year
    through 2015, leaving the unemployment rate a percentage point higher by then.
  • Core inflation would remain well below a rate consistent with the FOMC’s
    interpretation of price stability, reaching only 1.4% by 2021.

The Macroeconomic Advisers simulations do not envisage a “expansionary fiscal contraction” — no surprise given the fact that the US is not near full employment, is not a relatively open economy, and interest rates are very low. [1] That is, aggregate demand is not sufficiently spurred by declining interest rates as Federal demand for credit declines relative to baseline.
MA Chart 4.jpg

Chart 4 from Macroeconomic Advisers (2011).

The paper concludes:

We agree it is vitally important to adopt a credible and sustainable fiscal policy before financial markets impose an even harsher discipline on the process. However, our analysis suggests the wisdom of waiting a few years until the economy is on firmer ground and the federal funds rate is well off the zero bound. Then, the FOMC could ease more aggressively into a fiscal contraction, or even ahead of it. Alternatively, if we are to proceed immediately, a more measured near-term fiscal contraction, one that the FOMC could and would accommodate, seems advisable. We believe markets, which already seemed priced to a “fiscal fix,” would forgive such delays, especially if that time was used to forge significant progress on reforming entitlements, the cost of which are, after all, the primary drivers of our long-term fiscal imbalance.

The employment report reminds us that the economy is in a fragile state, and macroeconomic analysis reminds us that we cannot hope for miraculous expansionary fiscal contraction to save the day. We need to maintain short term stimulus, while cutting the future trajectory of spending.

 

Addendum: Paul Krugman beats me to the punch on both the jobs issues and stimulus points. See also Chad Stone/CBPP’s comments.

StumbleUponLinkedInReddit

30 thoughts on “The Employment Report, and the Need for Maintaining Stimulus

  1. jonathan

    Stop talking sense.
    The take-away from this jobs report is that government is shrinking and the private sector is growing. To the GOP, this is great news: they want to see government shrink and their belief is that the more we shrink the government the more the private sector will grow.
    You are arguing about sensible economics. They are making an entirely different argument. I posted a version of this on Jared Bernstein’s blog. They are making the argument that we can’t: we can’t build roads, we can’t build bridges and tunnels, we can’t provide healthcare, we can’t provide anything. The reason “we can’t” is the government. The solution is to shrink government.
    This is not sensible but it is a powerful argument. They say we are in tough times, surrounded by evil – debt is evil, regulation is an evil restraint of liberty – and the only way through this valley of the shadow of death is through faith. This is a classic example of a society being taken over by belief. They say awful things are happening and exaggerate them – like your weird commenters who say we’re just like Greece – and then simplify, simplify, simplify reality to good versus evil. It is only through adhering to the ideology, to the faith, that we can survive this trial. America is a religious nation. This kind of demagoguery has great native appeal.
    We look at history and see the folly. We point at China’s idiotic Great Leap Forward, at the Soviet Collectivisation, at any number of ideological stupidities. We are well on the road to becoming one of these follies. The lesson of today: we never realize we are turning our backs on reason to embrace faith until reality smashes us into submission. We are now the country that pursues belief despite fact. We are now the country that twists and distorts facts so they support belief. While the Communists of China now embrace pragmatic economic development, we pursue ideological purity.
    It is sad to watch a country turn away from reason. That never ends well.

  2. Anonymous

    Menzie,
    What makes you think Govt stimulus multipliers are greater than 1? Have any academic or empirical studies been done that show this? Thanks in advance.
    -Libtard.

  3. Elvin

    There are other things that could be done besides a fiscal stimulus. Some examples:
    – Pass the free trade treaties without the TAA. This should have been done years ago. Now Columbia and Korea are signing treaties with Canada and Europe.
    – Ease the Davis-Bacon Act in Federal hiring
    – Permit immediate drilling for oil and natural gas
    – Stop fighting Boeing on opening a plant in South Carolina.
    Obama’s economic policies have turn a weak recovery into a poor one.

  4. Edward Lambert

    Nobody is doing an analysis on changes in wealth/income inequality… Why?
    If you take into account a policy to transfer wealth, the outcome will be different too.
    Why is nobody adding this kind of policy into the analysis??

  5. ppcm

    Even a social science may be willing to make its own of “Rien ne se perd, rien ne se crée, tout se transforme” “Nothing creates itself, nothing gets lost, all change”
    May those figures be explained as an outcome of past policies,and may the same figures be explained as vectors of further fiscal stimulus.
    FEDERAL RESERVE statistical release
    Flow of Funds Summary Statistics First Quarter 2011
    At the end of the first quarter of 2011, the level of
    domestic non financial debt outstanding was $36.3
    trillion; household debt was $13.3 trillion,
    non financial business debt was just under $11
    trillion, and total government debt was $12 trillion
    P15 Credit Market Borrowing by Sector and please do not miss the P16 as the most relevant picture of the potential for further fiscal stimuli.

  6. dwb

    bernanke-san needs to be impeached for failing to respond with agressive monetary stimulus. QE1 and 2 were at best timid responses. Sure, in a liquidity trap the elastisicy of output wrt declining rates is small… but the velocity of money is not zero. Which means we need much much more of it. The fed should just print a trillion dollars and give it to the Treasury to pay down debt.

  7. Ricardo

    In economics Einstein’s definition of insanity is an understatement.
    And in the immortal words of Barak Obama:
    “Shovel-Ready Was Not as Shovel-Ready as We Expected”
    Okay, everyone who believed that all the stimulus money sent to the states to save state government jobs would actually save government jobs raise your hands. I see Menzie, and I see Slug, and I see Mark, oh and over there, I see Paul K ….
    Okay, now everyone who believes that adding 57,000 private sector jobs every month is going to bring us back to full employment raise your hand….

  8. Ed Hanson

    Perhaps a more relevant chart is one provided by John B. Taylor or at “Economics One”. I am unsure if this website supports imported images, but I will try. If no image appears, then try copy and click the following site.
    http://3.bp.blogspot.com/-e5ei3pPVrD0/TheY7ReAj8I/AAAAAAAAAd8/0DQmT8wKmvw/s400/er8209.jpg
    Simply, putting the power and responsibility where it belongs, the individual and private market by meaningful tax rate reduction and reduced regulation has shown to be a faster and superior solution. Stimulus is still command economy.

  9. David Pearson

    Menzie,
    What does “we need to maintain stimulus,” mean? Keep the current deficit level? Or increase it with another ARRA? Didn’t you think ARRA was itself insufficient to produce self-sustaining growth?
    Since 2001, we have been on a trajectory of “too-weak” fiscal stimulus and negative real interest rates. At this point, the best time to leave this trajectory seems to be always, “in a few years.” Where does this lead us? Is the alternative (admittedly high short term pain) always worse than plausible the endpoint?

  10. nilys

    jonathan wrote: This is a classic example of a society being taken over by belief.

    It’s about protecting the “wealth” and status that were ill-gotten during the “boom” years – protect the money bags from taxes, inflation, debt repudiation by private and public entities, the wrath of the impoverished electorate, budding reform movements; appeal to the lumpen proletariat and feeble-minded tranches of the society, confuse and misdirect, can and pickle the society so that it slowly rots and ferments. Both stimulus and austerity are ridiculous without political reforms.

  11. ScottB

    I agree that more fiscal stimulus is necessary to prop up the economy, and believe also that it is a temporary fix.
    As a public school activist, I can tell you first hand that the stimulus saved schools from large budget cuts last year, but those cuts are now being rolled out across the country. So the stimulus saved jobs and preserved services, and that is now being undone. Middle and upper class kids can survive schools with higher class sizes, kids from low-income families, not so well.
    However, a stimulus will ultimately be for naught unless we deal with our banking issues and break the shadow-banking system. I am currently working my way through Nicholas Shaxson’s Treasure Islands, and I’m learning that the problem is even worse than I thought. Because we have not re-regulated banking, we run the risk of an even bigger meltdown next time around.

  12. W.C. Varones

    David Pearson,
    Modern uber-Keynesians believe that their prescriptions will always work if given enough force and enough time. Outcomes like Greece are not conceivable in their framework.
    Keynes would weep to see the naïve extremism his work has spawned.

  13. aaron

    How’s this for stimulus. The housing crisis is well over three years out. More than enough time for interest to cover the drop in property value. Let’s not let borrowers off the hook for principal, but allow borrowers to seek protection from banks collecting interest on the portion of debt that is not supported by asset prices. In exchange, give that debt some priority, make it unforgivable.

  14. aaron

    Ed, yes. But I caution, tax breaks aren’t enough. They need to be progressive. Income inequality is a big drag on velocity. Wealth provides a fundamental advantage which needs to be handicapped.
    Perhaps our income should be taxed, but the rate should be based on assets rather than income.

  15. Ed Hanson

    aaron
    In reverse order.
    As Hernando De Soto has shown property and solid title to property is basic for economic growth. And as I can personally testify, as a not very rich home owner, who’s property taxes are about even in size of my interest charge on my mortgage, that particular tax has a large detrimental on my ability to save and invest. And since I am a strong proponent that property rights, which include both real property and general wealth, are a fundamental individual right, I completely disagree.
    I am certainly am open to change in method of taxation, but my preference is tax money only once and on consumption.
    I see only head taxes as not being progressive, and I am opposed to head taxes. Flat rate taxes are progressive in that someone who earns 5 times what another earns pays five times the amount as the other. If taxes remain based on income, I would like to see less progressive rates on the margin along with higher personal exemption to keep the taxes from burdening the less affluent and not to create a barrier to earn more on those same people.

  16. aaron

    Good point. But I’m not suggesting taxing wealth, just income. And, part of the idea is to encourage spending and discourage saving among those who have large saving already. It does have the very averse effect of decentivizing work among the wealthy, perhaps that can be fixed by only taxing income saved.
    Eliminating taxes below the median income has often appealed to me. Why even burden them with the process. It would cut a lot of overhead too.

  17. Ed Hanson

    aaron
    I see your point that you are basing your ‘progressive tax rate on income’ on wealth not just the income. I think I still disagree but realize that I misinterpreted your ideas in my post above.
    I believe that a high personal exemption at the medium income is too great a level. Exempting half the earners in the country from taxation makes too many people without “skin in the game”.

  18. Ricardo

    I was reviewing some papers I had in my resource pile and came across an interesting paper by Lars Ljungqvist and Harald Uhlig printed in the June 2000 volumn of The American Economic Review. The article entitled Tax Policy and Aggregate Demand Management under Catching up with the Joneses makes the John Kennedy demand-side Keynesian case for lowering taxes during a recession. While I am not a demand side economist, perhaps this article will help some to understand why tax cuts are critical to recovery.
    Excerpt:
    The optimal tax policy turns out to affect the economy countercyclically via procyclical taxes, i.e., “cooling down” the economy with higher taxes when it is “overheating” due to a positive productivity shock. The explanation is that agents would otherwise end up consuming too much in boom times since they are not taking into account the “addiction effect” of a higher consumption level. In recessions, the effect goes the other way around and taxes should be lowered to “stimulate” the economy by bolstering consumption.
    This does bring demand-side theory closer to supply theory as the implication is that the supply of goods relative to available money is reduced when demand is “stimulated.” This leads not only to inflation but to falling production as malinvestment creates shortages of factors of production.
    But while the argument arrives at the same conclusion, it is the flip side of supply-side theory because it frames the argument in a consumption model rather than a production model. It misses the key element in economics that economic actors produce to consume and money is simply the vehicle used to efficiently connect the two.

  19. W.C. Varones

    The continuing weakness, and the uber-Keynesians response to it, was entirely predictable, so I’ve been accumulating more physical silver over the past few weeks.
    Gold and silver spiked Friday on the obvious knee-jerk policy response to the horrible employment numbers.

  20. Dave

    Is this the same Macroeconomic Advisers who “estimated” in 2009 that the Obama stimulus would ADD 3.3 million jobs by the end of 2010, and CUT the unemployment by 1.7 percentage POINTS?
    More Keynesian comedy…

  21. aaron

    I’m not sure gold an silver have much to do with us. We’ve been selling ours. China and India are the buyers. Currency risk is much more real to them.
    Silver is useful for industry in a good economy at least.

  22. menzie chinn

    Anonymous July 8, 7:27pm: Take a look at this category “multipliers” for why I think for certain items, the multiplier is larger than unity, especially when interest rates are stuck at the zero bound, and there is slack in the economy.

    Anonymous July 8, 7:57pm: He’s not lying; he’s just being (very) selective in the choice of estimates. That is why in many posts, I keep on referring to the range cited by CBO.

    Ricardo: I won’t speak for the others you cited, but for me, I was not so worried about the number of shovel-ready projects, nor was I so worried that the spending programs would persist for a long time (this pertains to the “timely” issue in Washington jargon of 3 years ago), exactly because I knew from the empirical literature that a recession combined with a housing bust combined with a fianncial crisis would lead to a modest to weak and prolonged recovery.

    By the way, you never responded to my data-based explication of why your characterization of greater defense-based stimulus under Obama versus Reagan. Do you now admit you were wrong on that count?

    W.C. Varones: Greece has a higher net debt-to-GDP ratio…

  23. David Penwell

    To whomever can answer this…..
    If Keynesian policies worked, why would an economy ever have a recession? One quarter of negative GDP, apply “ye ole Keynesian elixir”, and all is well.

  24. Steven Kopits

    If we’re energy-constrained, then more stimulus is unlikely to help, except if it:
    1. increases energy production
    2. facilitates a change to more efficient energy use (with an acceptable social return on investment)
    3. creates exports
    No. 1 does not require subsidies. It does require ‘right-sizing’ regs and legistation. No. 2 may require modest, but not great, subsidies, and also appropriate regs. No. 3 is interesting to consider, but again, appropriate legislation is probably the only real requirement.
    Otherwise, more stimulus threatens to become the fiscal version of Arthur Miller’s monetary policy: an attempt to maintain consumption when really we should be adjusting to a constrained energy budget. Under Volcker, US oil consumption dropped by 4 mbpd over 4 years; so far, in this cycle, we’ve dropped 2 mbpd over 2 years. Oil prices are telling us there’s clearly more to do.
    Finally, we need to run some numbers on what happens if we apply stimulus and go into an oil shock. Typically, unemployment increases by 4 percentage points and the deficit, by 2% of GDP. Can we run, say, a 12% GDP deficit for the next three years or so?

  25. Misaki

    The employment report reminds us that the economy is in a fragile state, and macroeconomic analysis reminds us that we cannot hope for miraculous expansionary fiscal contraction to save the day. We need to maintain short term stimulus, while cutting the future trajectory of spending.

    Keep in mind…
    1) the economy is expanding, it’s just that ~90% of that growth is in corporate profits
    2) while it would be possible to create jobs in the short term with fiscal stimulus, only 42% of the general public supports doing so while 52% oppose it and say reducing the national debt has priority.
    Given these two facts, it would seem prudent to pursue a method of reducing unemployment that does not involve the government paying corporations to provide expensive status symbols to consumers.

  26. dwb

    New WSJ business survey and *shock* its a dearth of demand holding hiring back – not the business confidence fairies!
    We are not going to have sustained momentum in the recovery until people are convinced the recovery is durable. To convince people we are not going to slow down we need more acceleration, more gas. If people are not convinced we’ve achieved liftoff velocity, I just don’t see where 2.5% growth is coming from in the 2nd half. Fire bernanke-san, anyone?
    Dearth of Demand Seen Behind Weak Hiring
    http://online.wsj.com/article/SB10001424052702303661904576452181063763332.html?mod=WSJ_hp_LEFTWhatsNewsCollection

Comments are closed.