Policy action is needed, with all deliberate speed.
Figure 1 provides a summary snapshot of the labor market.
Figure 1: Log nonfarm payroll employment (blue), household series adjusted to NFP concept (red), private nonfarm payroll employment (green) and ADP measure of private nonfarm payroll employment (purple), all normalized to 2009M01=0. Source: BLS and ADP via FRED, and BLS, NBER, and author’s calculations.
Clearly, all employment measures — overall NFP and private — are below their corresponding measures at the peak at 2007M12, while growth (which can be inferred from the slope of the curves, since the series are logged) remains at lackluster rates. It is interesting that the ADP series trended higher than the corresponding BLS measure of private employment in the last few months.
On the other hand, the private NFP measure is above the levels recorded in 2009M01, while the alternative (experimental) BLS measure touted by conservatives in the early 2000’s is slightly below levels recorded at 2009M01. (This experimental measure is now about 1.9 million above the establishment series). The experimental measure is discussed in this post. [edits added 2:40PM Pacific; thanks to Steve Bronars for catching my error – MDC]
Figure 2: Log nonfarm payroll employment (blue), household series adjusted to NFP concept (red), private nonfarm payroll employment (green) and ADP measure of private nonfarm payroll employment (purple), all normalized to 2009M01=0. Source: BLS and ADP via FRED, and BLS, NBER, and author’s calculations.
Hence, while the labor market continues to improve, it’s clear that much more needs to be done, particularly as we hurtle toward the fiscal cliff, and Europe sinks into de facto recession. A further easing, via QE3, is clearly on the table, and in my view, critically needed. Deutsche Bank assesses the potency of such measures thus:
Our quantitative assessment of the effects of the FOMC’s
unconventional balance sheet policies to date indicates that the
Committee still has significant scope and firepower to boost financial
conditions and stimulate the economy if it chooses to do so. Indeed, we
find that the Fed’s actions have been the primary reason for the drop in
Treasury yields from 3.0% to 1.5% in recent years. And, in line with
some other studies, we find that the effectiveness of QE measures has
not diminished appreciably with its increased use.Hooper, Mayer, Spencer, Slok, Global Economic Perspectives, September 7, 2012 [not online]
More discussion at CR, Ip/Free Exchange, Thoma, and Duy/Economists View.
“Indeed, we find that the Fed’s actions have been the primary reason for the drop in Treasury yields from 3.0% to 1.5% in recent years.”
I find this a little disconcerting. The FED is the only thing keeping our interest expense from doubling?
Nope, the FED has had nothing to do with the fall in long term rates. Typical lost post.
The fall in long term rates was all due to the European stuff. Literally. Notice how they zoomed up yesterday.
I would go with ADP over BLS. BLS is having bad seasonal adjustment issues right now. It will be up to another “flank” of the govt stat. to figure it out.
First – I am confused. It looks like the green line is the only one above Jan 2009. That is nonfarm payroll and I know from BLS website that NFP private is above its level in January 2009 by 0.38%. You should check this and possibly edit the post.
Second – in January 2009 18.5% of household employment was part-time. Today it is 19.5%. Full-time employment is down -1.25% since 1/2009 and part-time employment is up 5.38%. This is from the overall household survey and not the alternative (experimental) BLS measure. Nonetheless in terms of full-time equivalent employment it appears we are below January 2009.
This is a very iffy subject.
We all seem to agree that smaller government is better. We have smaller government: take out the shrinkage in public employment and the private job growth is better than in either of GWBush’s terms. If we want smaller government, then we have to accept that jobs in the public sector will decrease in number.
There is of course the “theory” that shrinking government will not only lower the costs by those employees – and programs, one assumes – but will also generate a boom in the private economy. We haven’t see that, but to give some measure of credit to an idea I think is silly we live in a weird time in which Europe is struggling mightily and Asia is propping up their economies.
One can of course say we should cut public employment when times are good but that’s much, much harder to do than to cut debt when times are flush. You can pay down debt because your tax revenues go up as the economy improves, just keep the cost growth below revenue growth, but you can’t really expect government to lay off and fire people when times are better. There are too many constituencies for services. Note I’m not saying services are needed, just that Americans seem to have little tolerance now for paying for them through taxation.
Steve Bronars: Thanks for catching that misinterpretation of the series (the graphs are correct). Private NFP is indeed above 2009M01 levels; text now fixed. (I should’ve remembered this from Figure 6 of this post on 9/3.)
At first I thought I was reading a spoof. But maybe I’ve just been misinterpreting all of the defenses of policy for the past three years.
After all, isn’t the policy action being demanded essentially a continuation of the policy actions for the past three years? You know, “the Fed has to do something.” Hence, QE3. Isn’t that also the definition of insanity? … no change in actions but hoping for a different result.
Bruce Hall I’ve been as critical as anyone regarding Bernanke’s Prince of Denmark impersonation, but even I don’t think it’s within the Fed’s power to do anything more than just fight a rear guard action against deflation and even worse economic news. What we need is strong fiscal policy. That worked in 2009 and 2010. The recovery was doing fairly well as long as the stimulus was going. But when the stimulus faded out in late 2010 and 2011, then things started to flatten out. The economy is able to grow at something like the long run trend rate, but not fast enough to close the output gap. We need several quarters of robust growth to close the output gap, and that kind of aggregate demand can only come from the federal government as long as the private sector is trying to repair balance sheets.
Hooper, Mayer, Spencer, Slok with Deutsche Bank stated:
How is this causal relationship scientifically established by the authors?
but brad delong says every is bitchen,and obama can do no wrong,romney is the big bad wolf!
2slugs We need several quarters of robust growth to close the output gap, and that kind of aggregate demand can only come from the federal government as long as the private sector is trying to repair balance sheets.
Let’s assume Congress can target $X Trillion of investment at “appropriate” projects. How large is X? (I understand your logic that we borrow now while rates are low and invest while there is slack in private investment and spending.)
One problem with stimulus is that the private sector knows it will end, so the private sector will not commit to long run private investment. Without private investment, the government induced increase in growth will peter out.
It seems like kind of a crap shoot whether or not government stimulus will stoke the embers sufficiently to create a sustainable rebound. If not, then public debt has grown dollar for dollar by $X trillion, but tax revenue has not. We end up with a deeper debt hole.
I know how it’s supposed to work, but Keynesian stimulus is best suited for a 6-12 month downturn, not a 6 – 12 year stagnation. Keynesian stimulus is also not well suited for a situation in which government is running a debt/gdp ratio approaching 1.0.
It’s going to take some creative policy makers to get the world out of this funk.
tj When the government spends it purchases real goods and services from the private sector. That means real resources are consumed in the production of those goods and services. Inventories will be drawn down and those inventories will have to be replenished. Workers will receive paychecks, which will fuel other private sector activity. People with jobs not only repair balance sheets, they also start feeling wealthier and increase consumption. Businesses will respond not only to government demand, but the second order part of the multiplier beyond 1.00.
It is true that we will end up with a higher stock of debt; but don’t forget that if you don’t do fiscal spending the economy suffers an equal loss of welfare (utility) on the flow side. So you save $X in debt and give up $X in benefit streams. The real issue is whether the benefit flow from the infrastructure projects is greater than alternative investments. In the current environment that’s a no brainer.
Actually it is monetary policy that is best suited to 6-12 month downturns. Those are your garden variety recessions. I would not recommend fiscal policy for those kinds of cases. Fiscal policy really only makes sense when the economy is at or near ZIRP and we don’t have to worry about fiscal stimulus kicking in at just the wrong time. Again, that’s not something we should be concerned about today.
There is no 100 percent absolute guarantee that old school Keynesian fiscal stimulus will work. I think the odds are very good tha that it will and it certainly did in 2009 and 2010 until the stimulus ran out. But even though there is some small chance that Keynesian policies won’t work this time, why would that small chance of failure lead us to adopt a policy that we know with a high degree of confidence absolutely will not work. We know that austerity won’t work, so how is that an answer to the small possibility that Keynesian policies might not work?
Jan P. Perlwitz: The estimate is based upon a survey of extant empirical literature on the subject (many of them “event analyses”), including Hamilton’s analyses [a]; he presents some discussion here, and discusses Gagnon et al.’s study here
The GOP is arguing that spending money on defense, even setting a floor for spending of 4% of GDP – which would cause a massive increase, perhaps $2T over 10 years – is a jobs program. Apparently, not Keynesian because it’s the military.
The usual analysis is that military spending has less of an effect than spending on other stuff. But that don’t matter, do it? I gather Romney is running ads in the key states claiming his spending program will add tens and tens of thousands of jobs. Spending? I thought the problem was the deficit.
I’m so old I can remember way back when people argued that infrastructure stimulus was risky because the recession would be over before the projects could get started. If it wasn’t “shovel ready”, don’t even bother.
Menzie, thanks. I’m going to check out the links you gave. Let’s see how far I get with my layman understanding of the topic.
“Hence, while the labor market continues to improve, it’s clear that much more needs to be done, particularly as we hurtle toward the fiscal cliff, and Europe sinks into de facto recession. A further easing, via QE3, is clearly on the table, and in my view, critically needed.”
… he says as he prays to the almight currency gods, smoke rising in circular columns as his incense burns. His heart jumps at the though of the wonderful magic of QE3, but then falls just as quickly when he considers that the great shaman, Bernanke, may not have the courage to prepare sufficient potion to wash over every person. But he is proud because his prayer still hangs in the air. He has done his part, he has completed his absolution…
jonathan wrote:
The GOP is arguing that spending money on defense, even setting a floor for spending of 4% of GDP – which would cause a massive increase, perhaps $2T over 10 years – is a jobs program. Apparently, not Keynesian because it’s the military.
Please cite your source.
J. Hamilton review of the last two monetary expansion (Econbrowser post) was showing empirical evidences,when the first CBs easing of monetary conditions were having an indeniable effect on employment,the last one exhibits more mitigated impact on the same.
We are left with the same credulity that drove this crisis,the financial money illusion will cure and will supersede the structural economic problems.
It is worth to be stressed that in the 30s,the Central Banks were slow to respond with quantitative easing,with a time lag they did implement very flexible monetary policies and the lags effects are recorded.
Meanwhile Ricardo prays to some golden idol.
The source for the spending level, dummy, is Mitt Romney’s campaign website. It says he would “Set a core defense spending floor of 4 percent of GDP.”
The source for the spending estimate is the Center for New American Security. That’s their analysis. I’ve seen other estimates. One, for example, is that defense spending would go up by $400B in the first Romney term. That was reported by Bloomberg and I don’t know their sources. Another says defense spending would go up $100B in the first year, which might be just division of the first number for all I know. The bigger than $2T number is actually a better thing because it depends on the US economy growing at a fairly high rate over time. I suspect by that point the “floor” would have holes in it.
But the point remains: he wants to set core defense spending at 4% of GDP. He has defined core defense spending in a way that amounts to about 93% of total defense spending. The assumption by all is that the other 7% is on top of the 4%, not that it’s eliminated. That’s because the core budget doesn’t include war costs.
Here’s a quote from CNN Money:
“With the Pentagon’s base budget — which does not include war costs — forecast to hit 3.5% of GDP in 2013, a jump to 4% would mean an increase of around $100 billion dollars in defense spending in 2013.”
They note that if the budget increased to 4% immediately the additional spending could be as high as $2.1T.
2slugs When the government spends it purchases real goods and services from the private sector. That means real resources are consumed in the production of those goods and services. Inventories will be drawn down and those inventories will have to be replenished.
This is the tricky part. If we get another round of spending on highway construction, alternative energy, etc, it’s not broad based enough to kick start a sustainable recovery.
At the same time, we have policy makers diverting funds to their favorite special interest and it goes right down the drain as it lines the pockets of cronies in favored industries.
I am not saying 100% of stimuus spending ends up like this, but enough of it gets siphoned off so that the mulitplier is reduced.
I will also reiterate that if buisness doesn’t expect the recovery to be sustainable then the mulitplier is reduced as stimulus dollars get set aside in “sunny day” accounts. That is, money to be spent when firms believe the recovery is sustainable.
These are some reasons why policy makers need to be creative. Not only do they have to resist cronyism, but they have to get business and households to believe the temporary-stimiulus-induced recovery is sustainable.
Sure “government stimulus” would boom growth. Money into peoples hands. The only way it could not is if they couldn’t spend. That may happen, but saying those extra purchases wouldn’t boost growth is not rational.
The skimpy ARRA provided the biggest growth surge in the economy since the end of the contraction.
The real problem is the structural issues that are causing the need for “stimulus” in the first place. Keynes would blame wages as he was a wage-inflationite compared to the modern intellectual core.
what’s the point of looking at nonfarm payrolls ? I’m asking because PAYEMS broke its 50 year long trend around 2000 and has been stagnant ever since.
Slug,
Thanks!! Imitation is the greatest for of flattery. Of course imitation loses its punch when it is a silly attempt at wit.
I think US unemployment is coming from structural failure of education system rather than worsening economic condition. If we look at unemployment rate, we will see major driver of high unemployment coming from teenagers with nearly 25%. If we look at education we will see that the below Bachelor’s degree will be the major of high unemployment. The unemployment of Bachelor’s degree is at 4.1%. We can see the education will help reduce unemployment with more skills. The skill mismatch of young workers and aging uneducated workers would be the major reasons of high unemployment. The QE cannot solve the problem becasue high skill labors can find jobs and the improvement of productivity and technology will need more skill labors not unskilled labors. The more QE with more expectation of QE will not solve high unemployment but QE will destroy the root of problem of structural shifts in US/global economy on the need of high skill workers but more QE, the higher inflation and the more support of unproductive economy to go bigger and one day the unprodcutive economy will destroy the major economy from speculative bubble in stocks, real estate or subprime lending in real estate, auto etc. QE is very crazy policy. The global economy cannot survive with unproductive economy but QE will support unproductive economy to survive with the support of higher unskill labors to get jobs. Only way to solve unemployment in US is bring uneducated and unskill workers to get education and work productively in productve economy. Surely the structural unemployment will be lower from education not from QE but QE that will be annouced on 13 September will hide the root of high structural unemployment in US. Fiscal policy is important to drive growth but stupid policy that we have seen like Bush tax cut or sustaining welfare support for unemployed will destroy economy. Bring budge to improve worker skills, support cheap education for Bachelor’s degree and technology not hike tuition fee like this.
jonathon wrote:
There is of course the “theory” that shrinking government will not only lower the costs by those employees – and programs, one assumes – but will also generate a boom in the private economy. We haven’t see that…
Jonathon assumes that we tried to shrink govt over the past couple years and then says it hasn’t worked. Let’s see. We increased 2008 spending by 18% in 2009 with so called, “temporary and targeted” stimulus. Then in 2010 until now we held the spending at elevated levels compared and call this “the lowest growth ever in govt spending”. So Jonathon, what part of 27% higher than 2008 qualifies as a shrinkage in govt?
Here are the actuals:
2008 spending was $2982.54 (treat this as the baseline)
2009 spending was $3517.68 which is 18% higher than 2008
2010 spending was $3456.21 and still 16% higher than 2008
2011 spending was $3603.06 and now 21% higher than 2008
2012 spending is estimated at $3795.55 a full 27% higher than 2008.
“Federal spending since I took office has risen at the slowest pace of any president in almost 60 years,” Obama said at a campaign rally in Des Moines, Iowa. LOL