James Pethokoukis

Politics and policy from inside Washington

A case for long-term high unemployment in America

Sep 11, 2009 14:30 UTC

A fantastic article by Joshua Cooper Ramo looking at whether the US is doomed to years of high unemployment. Read the whole thing, but this a key bit:

Many of the ideas Summers developed were codified in a 1986 article titled “Hysteresis and the European Unemployment Problem.” Even today it’s a piece he’s proud of: “Ah, yeah, the hysteresis article,” he interjects when it’s mentioned. Hysteresis is a word that you (and the rest of us) should hope we don’t hear too much of in the coming months. It comes from the Greek husteros, which means late. It refers to what happens when something snaps in such a way that it can never be put back together. Bend a plastic ruler too far, drop that lightbulb — that cracking sound you hear is the marker of hysteresis. There’s no way to restore what has just been smashed.

The idea that hysteresis happens to economies is one that economists don’t like to think about. They prefer to consider economies as yo-yos tethered to the sturdy string of the business cycle, moving up and down from growth to slowdown and back. But from time to time, things do snap. And Summers’ argument in 1986 was that unemployment in Europe, the sort that might persist in the face of growth, was an expression of an economy that had snapped. Europe’s economy was hit not only by shocks like an oil-price spike, a productivity collapse and rocketing tax rates but also by stubborn unions that made hiring, firing and adjusting payrolls near impossible.

Hysteresis, Summers explained, could come from all sorts of shocks like this. And that may be what is playing out in the U.S. If you look at the three great job busts of the past 100 years — the 1930s, the early 1980s and today — you find an important difference. The Reagan recession ended with workers returning to jobs that were the same as or similar to the ones they had lost. But 1930s joblessness was structural. The jobs people lost — largely in agriculture — never came back. Workers had to move to the industrial sector, a transition helped by the demands of a war. It was massive national hysteresis. Sound familiar?

Why the Dems may implode in 2010: 4 scenarios

Sep 9, 2009 10:10 UTC

A Democratic meltdown next year? Washington is abuzz with speculation by prominent political handicappers such as Charlie Cook and Stuart Rothenberg. Republican hopes for a huge congressional comeback in the 2010 midterm elections rest on three pillars:

1) History. Since the start of World War Two, the president’s party has lost an average of 28 House and 4 Senate seats in the midterms. Computer-aided gerrymandering, though, has made incumbents tougher to knock off in the House.

2) Policy. Concerns about ObamaCare — too much government spending scares independents, too little spooks seniors — may help turn 2010 into a 1994 replay. What’s more, cap-and-trade makes Congress appear more interested in imposing new economic costs than creating jobs. Current congressional approval ratings hover around the high 20s, while a new Rasmussen poll shows Republicans hold a 44-37 lead on a generic midterm ballot.

3) The economy. This is the most important of the three. As long as the recession continues, the biggest Obamacrat achievement — the stimulus –- risks looking impotent and a waste of $800 billion. At the same time, healthcare, energy and financial reform almost look like distractions. What’s more, high unemployment – now at 9.7 percent vs. 7.6 percent in January — is driving down President Obama’s approval rating. It’s fallen from 61 percent to 53 percent during the past three months, according to RealClearPolitics. And a president’s approval rating may be the single most important indicator of how his party fares in a midterm election.

But lately some GOPers have been wondering whether the economy might start working against their political fortunes. Economists to whom those on the right pay close attention — Brian Wesbury of First Trust Advisors, Michael Darda of MKM Partners and Lawrence Kudlow of CNBC — have been forecasting a recovery.

And that recovery might look pretty strong initially. During the first quarter of the last 10 economic recoveries, real GDP has risen close to 6 percent on average. And both Wesbury and Darda see the economy growing at least four percent next year. The worry for Republicans is that the Obamacrats will plausibly be able to take credit for both avoiding a depression and igniting the subsequent turnaround. (Ben Bernanke and the Fed kind of get lost in the White House narrative.)

But abstract GDP figures aren’t as important as the unemployment rate. As long as that number is at the highest levels in a generation, Americans are likely to feel anxious about the broad economy and their place in it. Here are four economic scenarios and their political impact:

1) The Double Dip. The worst of all worlds for Dems. The economy slips back into recession next year, pushing the unemployment rate to at least a post-WWII high of 10.8 percent. Economist Nouriel Roubini says that weak labor markets, weak banks, weak consumers, weak profits and weak trade create a strong risk of just such a “W-shaped” scenario. If so, not only does John Boehner maybe take back the gavel from Nancy Pelosi, but Hillary Clinton and Russ Feingold start looking for reasons to visit Iowa and New Hampshire. Probability: 10 percent

2) The Big Muddle. The economy keeps growing, but only in the 2 to 3 percent range. And that wouldn’t generate many new jobs. IHS Global Insight, for instance, predicts GDP growth of 1.8 percent with unemployment averaging 10 percent next year (and 9.4 percent in 2011). This is also where the Federal Reserve lands. The Fed forecasts growth of between 2.5 and 3 percent with unemployment declining “only gradually.” In this case, expect greater-than-average Dem losses. Harry Reid might get voted out by his fellow Nevadans while Pelosi might get the boot from fellow Dems. Probability: 50 percent.

3) The Big Bounce. A combination of Fed stimulus, government spending and inventory restocking by companies produces growth of 4 percent or more. But even so, unemployment remains twice as high as what Americans have become accustomed to during the past generation. Economists at JPMorgan calculate that 4 percent growth would translate into an average of 200,000 new jobs a month next year. And if the unemployment rate ends this year at close to 10 percent, that level of job creation would only bring it down to 9.5 percent or so. Democratic losses are limited to the historical average give or take. Probability: 35 percent

4) The Obama Boom. It’s 1983-84 all over again. The economy soars as fast as it fell. Unemployment drops below 8 percent by Election Day as formerly terrified employers realize they cut too many workers during the recession. Dems have limited losses. Talk of a third party increases. Probability: 5 percent.

Bottom line: Unlike the Reagan boom, neither taxes nor interest rates look to be going lower anytime soon. And economies after financial crises tend to be slow growers. So it’s hard to envision a likely economic scenario without a jobless recovery in 2010. And as economic analyst Ed Yardeni points out, “The industries that have cut back the most (durable goods manufacturing, construction, and retail) are inherently labor intensive, and they are likely to remain in intensive care for quite a while.”

Passing a popular healthcare bill would certainly boost Democratic fortunes. But history and the economy would suggest that 2010 will be a big Republican year.

COMMENT

Very thoughtfull post on achievements. It should be very much helpfull

Thanks,
Karim – Positive thinking

Posted by Karim | Report as abusive

How high unemployment undercuts Obama’s agenda

Sep 4, 2009 17:43 UTC

At the end of the 2000 film “The Perfect Storm”, a Gloucester swordfish boat captain (played by George Clooney) finally accepts that his crew won’t escape a monster hurricane in the North Atlantic. “She’s not gonna let us out,” he says as the trapped vessel moves from the eye of the storm and back into the raging winds.

The White House economic team can probably relate. The nation’s unemployment rate jumped to 9.7 percent in August, said the Labor Department, after dipping to 9.4 percent in July. “That drop in July had been too good to be true,” sighed Nigel Gault, the chief U.S. economist at IHS Global Insight. Merely the eye of the storm, perhaps.

To be sure, the pace of monthly job losses is abating, falling to 216,000 compared with a high of 741,000 in January. It now also seems unlikely that the unemployment rate will hit a post-World War II high of 10.8 percent. Good news all. But the employment declines do continue nonetheless, with more than 7 million jobs lost since the recession began in December 2007

Also continuing to decline is President Obama’s approval rating, which has plunged to 53 percent from 61 percent during the past three months, according to an average of polls calculated by RealClearPolitics. Almost nothing poisons a president’s popularity like high unemployment.

And why think that the job market or the president’s approval rating will improve dramatically during the next year or so? Let’s assume a snappy recovery in 2010 with GDP growth of 3.5 to 4 percent. That’s the JPMorgan forecast. But despite a mild V-shaped recovery, the firm’s economists still see an average unemployment rate of 9.4 percent in the fourth quarter of that year.

Even the superbulls at First Trust Advisors, looking for 4.5 percent GDP growth in 2010, don’t see unemployment breaking much below 8.5 percent. Keep in mind that those rates are almost double what Americans have come to expect the past two decades. It’s going to seem like a jobless recovery to many voters.

The labor market isn’t going to let Team Obama out. Its troubles will continue to drain the president’s popularity and perhaps result in large losses for congressional Democrats in the 2010 midterms. If Obama still wants to pass big change from a position of moderate bargaining strength — and while he still has maximum muscle on Capitol Hill — it needs to be now. This would mean centrist proposals like healthcare reform that would expand coverage while also making it easier for individuals to purchase their own private insurance, or a climate change bill where revenue from carbon emission allowance auctions would offset payroll taxes rather than given away to companies or spent by government.

Rahm Emanuel, White House chief staff, famously said that you “never want a serious crisis to go to waste.” With the moment of acute economic crisis past and a long “muddling through” begun, the president’s time of opportunity is nearing an end.

COMMENT

But is’nt it so that, would the democrats have opposed the spending of the main part of the pre-crisis deficit (i.e. on the war in Iraq), they would have been marked as being unpatriotic or may-be even traitors?And, as far as te bail out for the banks is concerned, that was the only possibillity for the economy to sort of survive, if that had’nt come through the problems would still be there to a far bigger extend and then we would not have been given time to rebuild at all.So I think it was the best option for the Democrats to voted with the previous president in that case.Remains the big problem of export of work, did you see today’s info on this agency about the current deficit on the trade balance? (what are the main causes behind this deficit….?)The opposition is very good in turning facts around, see the lies about healthcare and the like (obama’s birth certificate) and then of course the lies that were part of the selling process for the Iraq war…and the political mess (trustworthiness) that followed.That money spent on supporting the economy should also be spent on products made locally, not on the other side of the globe at slave’s wages to increase profits for shareholders.If they would earn a decent wage out there and if their governments would look for improvement for the life of the poorest we would not have this problem. Everybody would be better ofBut of course in a free market economy we have to live with that or……should we do something about it?best regards,JB

Posted by Jens Bos | Report as abusive

What does 9.7 percent unemployment mean for Democrats?

Sep 4, 2009 17:09 UTC

Marc Ambinder looks at this question and concludes a) that anything under 10 percent is better than expected, b) 0.3 percent makes a big difference politically, and c) Team Obama will be able to more or less successfully blame Bush. His bottom line:

The economy is expected to play a big role in the 2010 elections, with Democrats bearing the brunt of a worsening situation. That’ll depend a lot on the duration of the decline, just how bad things get, and what direction they’re heading as November 2010 approaches. Right now, 9.7 percent doesn’t tell us a whole lot about how that will play out.

Me: How about this instead: Unemployment is killing the White House, and it doesn’t need to get a 0.1 percent worse to continue to suck the life out of this administration. Obama’s approval ratings are down 8 points in three months. People have become accustomed to very low rates of unemployment and short recessions. Those expectations are politically devastating to Democrats.

Are Obama’s healthcare troubles actually a good thing?

Aug 24, 2009 15:34 UTC

Mickey Kaus gives his theory:

It’s easy to forget that, even if Obama’s health care effort is bogging down, the effort itself still serves his presidency as a crucial time-waster, tying up Congress and giving him a reason to postpone (or the public a reason to ignore) those other divisive, presidency-killers. Obama needs some excuse for putting off unpopular Democratic demands; health care’s a good one. If he keeps failing to pass health care until spring, that might not be such a bad outcome. In fact, even quick passage was maybe never in his interest. There are things more unpopular than struggling. … Cap and trade, immigration legalization, “card check”—these are not what you’d call confidence building appetizers leading up to the main course of Obama’s presidency.

Me: None of it works when Americans have less and less confidence in Obama. And that number will continue to work against him as long as unemployment stays high.

COMMENT

Democrapic policies – from illegal amnesty, to card check, to “the fairness doctrine”, to health care, to affirmative action quotas, to lawyers for terrorists, to tax hikes – are all disasters for the US and unpopular.
It just goes to show that the health and happiness of America is not their primary concern – buying votes from special interest groups is.

Posted by allisonw | Report as abusive

John Wayne Syndrome: Americans like tall, square-jawed presidents during tough economic times

Aug 18, 2009 15:58 UTC

Will Americans go big in 2012? President Obama is a smidgen under 6’2″, Mitt Romney is 6’2″, Sarah Palin is 5’5″ … Tell us more, New Scientist:

When the going gets tough, the presidents get taller. So says social psychologist Terry Pettijohn of Coastal Carolina University in Conway, South Carolina.

He looked at the heights, ages and facial attributes of the 11 elected US presidents over the past 75 years, and compared them with economic and social indicators such as unemployment and birth rates. “What we’re seeing is that taller candidates are preferred when times are more difficult,” says Pettijohn.

Hard times also make for presidents with larger chins and smaller eyes, says Pettijohn. He thinks that voters associate these features with strength and maturity – qualities that could be perceived toprovide security in troubled times. The results were presented last week at a meeting of the American Psychological Association in Toronto, Canada.
COMMENT

I usually don’t read comments, much less respond to jejune remarks, but the pure ignorance of the citizenship arguments are getting obnoxiously embarrassing: Whether Obama or McCain were born in Kenya, China, or the middle of the Sahara, the fact that one of their parents was a US citizen at the time of birth automatically makes them a natural-born US citizen!

Posted by americanbychoice | Report as abusive

Why the unemployment rate is headed higher

Aug 7, 2009 18:55 UTC

There were no high-fives at the White House today because of this probable economic reality, as explained by the guys at RDQ Economics (the great John Ryding and Conrad DeQuandros):

The case that the recession ended in June continues to grow with this report.  The rate of job loss has downshifted and the lengthening of the workweek in July resulted in flat hours worked in the private sector and an increase in manufacturing hours worked, which in turn points to a gain in industrial production in July.  However, the decline in the unemployment rate was not a product of job creation, but a result of falling labor force participation.  The labor force is unchanged over the last year and, as the economy improves, people are likely to seek jobs, resulting in an increase in the unemployment rate.  We do not think that the unemployment rate has peaked—although the case that it can peak at around 10% (rather than 11% or higher) is now much stronger.

COMMENT

What? I doubt if anyone actually believes this stuff. If they do, they need to visit their local neighborhood psychiatrist.

Posted by Frank | Report as abusive

Poll: Obamanomics has too much spending, too much government

Jul 24, 2009 13:19 UTC

Notice particularly the the stats for independents …

072409gallup

Independents souring on Obamanomics (Virginia version)

Jul 9, 2009 11:28 UTC

Very interesting (via Politico):

A Public Policy Polling survey in Virginia found Obama’s approval and disapproval numbers effectively tied, with independents disapproving of the president’s job performance, 52 percent to 38 percent. “That is fairly consistent with all our polling around the country — Obama tends to be really well-liked personally, but he’s starting to lose a majority of the independents,” said Public Policy’s Dean Debnam. Democrats have “had long enough in some voters’ minds that they’re getting blame for nothing happening, and Republicans are scaring them around health care and tax increases.”

And Obama, of course, isn’t up for reelection anytime soon, and even nervous Democratic congressmen can keep their fingers crossed for economic recovery over the next year.

“It’s been more or less inevitable that we’re going to see some decline in numbers for Democrats,” said Mark Mellman, another Democratic pollster. “For most folks, there’s not an election until 2010, and most economists suggest that by the time we get to 2010, we’re going to see the beginnings of an uptick in the economy.”

My spin: Is Mellman taking into account a possible jobless recovery? Upticks in GDP ain’t going to cut, I don’t believe.

COMMENT

I remember when Charles Krauthammer said back in January that Obama would start to own the recession 6 months into his term. Alot of people laughed at that prediction and said it wouldn’t be until 1-2 years into his term that he would own it. But now, based on all the polling, he was right on.

Posted by Tony Franjie | Report as abusive

The econ chart that should worry David Axelrod and the Dems

Jul 9, 2009 11:11 UTC

Brad DeLong worries that the downturn in bond yields is hinting at an anemic economic recovery.

A recovery in which unemployment is higher two years later than when
the recovery began is not much of a recovery. And I don’t see what is
going to keep the probability of such an eventuality low.

The lower are ten-year Treasury interest rates, the more are people
trading in the bond market willing to bet their money that the future
holds that kind of non-recovery recovery. And so I worry.

Me:  Think a second stimulus would change that trajectory? Remember that the 2001 Bush tax cuts were considered to be almost perfectly timed stimulus.

axelrod

COMMENT

Recall the first Stimulus Plan. The “design” is the problem.

The first Stimulus is not based on Political-Economy. Rather its based on Political-Political.

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