James Pethokoukis

Politics and policy from inside Washington

Noam Scheiber: Be happy with 8 percent unemployment in 2012, America

Oct 7, 2009 11:31 UTC

Over at his TNR blog, Noam Scheiber wonders what unemployment will be when Obama runs for reelection, noting that IHS Global Insight predicts it will be 8.1 percent:

8.1 percent unemployment in 2013 means a bit higher than that when Obama stands for re-election in 2012. In case you’re wondering, the last time the unemployment rate was nearly as high just before an election was 1992 (7.6 percent in September of that year–probably the last unemployment statistic to sink in before Election Day), which didn’t work out so well for the incumbent. Other high election-year unemployment rates in recent decades: 7.5 percent (September 1980) and 7.6 percent (September 1976), which also don’t appear to have helped the incumbent party’s cause.

On the other hand, it’s probably all somewhat relative. The 7.6 percent unemployment rate in September 1992 was pretty close to the peak of 7.8 percent from that business cycle, whereas 8.3 or 8.4 percent unemployment in September of 2012 would be substantially lower than the peak from this business cycle. By way of comparison, the unemployment rate stood at 7.3 percent in September 1984, but that apparently qualified as “morning in America” after a peak of 10.8 percent in 1982.

Me: One thing that Scheiber fails to grasp is that an 8 percent unemployment rate is roughly double what Americans have grown accustomed to in recent years. You could argue that 7 percent unemployment back in the early ’80s seemed more like a return to normalcy.

Americans then just came out nearly two decades of economic disruption. Americans today, a generation of prosperity. Expectations are different. Plus, unemployment has risen more than 5.4 percentage points from its cyclical low during this recession vs. 3.6 points during the early 1980s recession.

COMMENT

Well, Americans also grew ‘accustomed’ to seeing the value of their homes rising indefinitely and ‘accustomed’ to driving giant SUVs two blocks to the store to buy junk they didn’t need. If we should take the EXTREME excesses of last five years and have the gall to call it normal then America is sunk already.

Also, I find it interesting that you bring up the economic malaise of the 70s and early 80s often. You’re always quick to point the finger at Jimmy Carter and hail King Ronnie as a hero. Never once have I heard you mention that most of the problems if Carter were inherited direct effects of the massive spending in Viet-Nam and a severe recession in 72 that was never fully wrought out. Granted, his policies weren’t the greatest, but he was handed a deck stacked against him. And King Ronnie didn’t really see any effects of his radical changes (re:Reaganomics) for a full 3 years! In fact, things got much, MUCH worse the first 30 months under Reagan; the only good thing to come out of 80-83 was Michael Jackson’s Thriller album.

If Reagan gets 30 months grace and is lauded a hero for his destructive policies, maybe Obama should get more than nine months to see how his turn out.

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Is America stuck with high unemployment?

Oct 5, 2009 20:02 UTC

Is there a “new normal” for the American labor market? Are the days of an unemployment rate of just 4 to 5 percent a thing of the past?

That is the contention of some economists who see the sharp rise in joblessness during this recession as a warning sign of structural changes in the job market.

Yes, the U.S. unemployment rate of 9.8 percent is as high as it’s been since June 1983. And if you add in discouraged workers and those working part-time who would prefer a full-time job, the unemployment rate is 17 percent.

But it’s not just that unemployment is high. It’s that it’s far higher than what economists would have expected given the depth of the downturn.

The current unemployment rate is 5.4 percentage points above the nadir of the previous expansion. (During the terrible 1981-82 recession, by contrast, unemployment rose just 3.6 percentage points, although the peak was higher at 10.8 percent.)

According to an economic rule of thumb called Okun’s Law, which analyzes the relationship between unemployment and economic growth, peak unemployment should have been more like 8 percent. Indeed, that was the White House forecast at the start of the year. If Okun’s Law no longer works, that would be a sign of a tectonic shift in the labor market.

As would the findings of Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics. After a sector-by-sector analysis of the U.S. economy, he concluded that such industries as finance, retail trade, publishing and broadcasting are suffering from structural job losses that won’t likely turn around with an expanding economy.  What’s more, the employment share of industries seeing net structural employment losses during the current cycle is 36.2 percent, the highest level since the early 1950s.

And the special skills of workers from those sectors may be mismatched for higher-potential industries like healthcare and education. Once fiscal and monetary stimulus abates, Kirkegaard concludes, “the U.S. labor market is in for a long, hard slog.”

America’s new natural rate of unemployment may be more like 7 percent rather than roughly 4.5 percent. If so, then Kirkegaard’s policy recommendation of new spending on worker retraining is probably a smart one.

Then again, the U.S. economy and its marvelously flexible labor market have shown a knack for dealing with structural change without the government. Until the financial meltdown, the unemployment rate was below 5 percent despite the disappearance of 3.5 million manufacturing jobs during the decade to offshoring and
automation.

To JPMorgan Chase economist Jim Glassman, that performance “demonstrates that permanent job losses don’t have to stand in the way of bringing unemployment back down.”

Moreover, the high U.S productivity rate is a long-term plus for the labor market because it shows America’s innovative capabilities remain robust.

Not that government investment in job training, as well as infrastructure and basic research aren’t important as well. Reducing an onerous corporate income tax is also critical.

The deep resilience of the American economy may surprise the pessimists.  But we won’t know for some time. The unemployment rate typically peaks around 18 months after a recession concludes. So if the current downturn ended in June, we will be well into 2010 before we have a firmer feel on whether the “new normal” is here to stay.

COMMENT

no

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When the US labor market will begin to recover

Oct 5, 2009 14:13 UTC

Ed Yardeni has been crunching the numbers:

Based on the previous two cycles, employment might recover within the next 11-21 months after June, or between May 2010 and March 2011! It fell 289,000 during the 11 months following the recession trough of March 1991 and 1.08mn during the 21 months following the November 2001 trough. So far, it is down 768,000 from June through September. A similar analysis suggests that the unemployment rate should peak 15-19 months after June, or sometime between September 2010 and January 2011!

Is the US labor market broken?

Oct 2, 2009 19:00 UTC

US unemployment has been far worse than economists would have expected given the magnitude of GDP decline. Has something structurally changed with the American labor market? An interesting angle on this from Brian Wesbury and Bob Stein of First Trust Advisers:

The employment situation has remained much weaker much longer than the overall economy. In September, the jobless rate rose to the highest level since 1983, total hours worked fell at a 5.9% annual rate, and wage gains were a soft 0.1%. Payrolls came in worse than anticipated, falling 263,000, although payrolls fell a smaller 210,000 in the private sector. There are two reasons for the disconnect between the economic recovery and the labor market. First, productivity growth has been rapid of late, part of the ongoing process of technological change that rivals (and may surpass) the industrial revolution. Second, corporate leaders still think the recent spurt in growth will be short-lived and so are being overly cautious. In the short term, productivity growth lets companies raise production even as they continue to cut jobs. Over time, though, higher output with lower labor costs mean more profits, which will help stimulate rapid job growth once companies become more confident about the staying power of the recovery. When the labor market eventually turns positive, it will do so with a vengeance.

COMMENT

@ Frank:

Although I’m not a fan of unions, when it comes to any comparison between corporate management and unions the greater levels of douche baggery exist on the management side of the equation.

The rest of the unemployment problem rests with our government which enabled the abandonment of the American worker. America is no longer the greatest force to be reckoned with thanks to political infatuation with cash and power among the very few. Is America better than it used to be? Not from where I’m standing! Thanks a lot you guys!

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Is the US economy suffering from hysteresis?

Sep 25, 2009 18:10 UTC

That is, has the economy snapped in such a way that it can’t bounce back to its previous form? This might be true in the labor market. Mark Thoma takes a shot at the issue:

The 400,000 number used above assumes that employment will return to its pre-recession levels, but if  structural changes in the economy result in a lower normal level of employment, something many economists believe is a real possibility, then labor markets are even further off than indicated above. Personally, I believe that normal employment post-recession (i.e., after resources have moved out of housing, auto production, and finance and found new homes in other industries) won’t be far away from where it was pre-recession, but during the transition period, the rate of employment will be lower than pre-recession levels.

Me: Just how long will that “transition period” be? I think he is too flippant about the challenges of moving resources out of autos, housing and finance.  Wow, the hopes for clear energy must be awfully high!

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?

More on the weak U.S. labor market

Sep 8, 2009 14:14 UTC

This analysis from Ed Yardeni:

Based on the previous two cycles, the unemployment rate should peak in 15-19 months, or sometime between September 2010 and January 2011! When might employment recover? The previous two experiences suggest this might occur within the next 11-21 months after June, or between May 2010 and March 2011.

Is that too pessimistic? The optimists argue that companies may have fired too many workers, and will have to scramble to rehire once the economy improves. So far, during the first 20 months of this recession, payroll employment is down a whopping 6.93mn vs. total losses in employment of 2.71mn and 1.57mn during the downturns at the beginning of this decade and the previous one. Debbie and I expect that this recovery will be much more “jobless” than the previous two. 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.

COMMENT

I think that the fate of the economy still comes down to jobs and the consumer, and since there is no catalyst for employment growth in the US, and so many people will be using up their unemployment benefits soon, the Fed is going to choose to print more money to try to avoid deflation. And one of the few ways for the average person to maintain his or her wealth, in my opinion, is to invest in the area that should benefit most from the money printing, which is gold. There are some articles at http://www.goldalert.com that further discuss the employment picture, the Fed’s policies and its potential effects on the gold price.

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Why economic insecurity isn’t helping Democrats

Sep 8, 2009 13:49 UTC

Some Democrats thought they would have a much easier time pushing through changes in healthcare, trade and labor policy thanks to the recession. The theory was that economic insecurity would nudge people toward the warm embrace of government.  Obviously that does not seem to be happening. Indeed, past polls showed that economic downturns actually make people more skeptical of Big Government. Apparently, that is also true of Big Labor. This from a recent Gallup poll:

The 48% of Americans now approving of unions represents the first sub-50% approval since Gallup first asked the question in the 1930s. The previous low was 55%, found in both 1979 and 1981.

Indeed, there is a statistical relationship between rising unemployment and union disapproval (via Nate Silver):

The regression line finds that, for every point’s worth of increase in the unemployment rate, approval of labor unions goes down by 2.6 points. Alternatively, we can add a time trend to the regression model, to account for the fact that participation in labor unions has been declining over time. This softens the relationship slightly, but still implies a decrease in approval of 2.1 points for unions for every point increase in unemployment. Both relationships are highly statistically significant.

America’s battered labor market

Sep 8, 2009 13:32 UTC

David Rosenberg of Gluskin Sheff analyzes thusly:

1) Jobless claims stuck at 570k — basically in line with a sustained 200k-300k payroll losses.

2) Temp agency job losses are continuing even if at a slower pace — this is not good news.

3) Downward revisions to the prior data — these tend to feed on themselves.

4) No change in the record-low workweek.

5) The Challenger and JOLTS data reveal an ongoing decline in hiring intentions.

After last Friday’s report, we have now lost 6.9 million positions that have been cut during this recession and we have to count in the additional 2.5 million jobs that need to be created — but never were — just to absorb the new entrants into the labour market. The ‘real’ unemployment rate is now 16.8%, so to suggest that this down-cycle was anything but a depression is basically a misrepresentation of the facts.

Me: Maybe jobs will snap back. But given structural/longer-term changes in housing, finance and autos, that just seems unlikely to me.  Lots of entrepreneurial effort needed. But is the stage being set for less innovation rather than more?

Kudlow: Obamanomics and the jobless recovery

Sep 7, 2009 15:01 UTC

The great Lawrence Kudlow tells a hard truth, I think, about the economy and the day after tomorrow:

The threat of higher payroll taxes and energy costs is more than enough to deter new hiring. Taxes on upper-end investors are going to rise, too, and there may be a health-care surtax on top of that. And don’t forget that small businesses pay the top personal tax rate, which is going up. Oh, and how about the recent minimum-wage hike? Yet another business cost.

So while the government doles out money for transfer payments and one-time temporary tax credits, the ensuing increase in the private-sector tax-and-financing burden becomes a complete deterrent to new job creation, as well as capital formation.

We’re going to recover. Improved ISM reports for manufacturing and services, along with better profitability for big corporations, suggest we’re looking at a mild, V-shaped recovery of 3 percent. But it will be a jobless recovery.

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