MacroScope

Subconscience of a liberal: Krugman’s curious support of sweatshops

Who hasn’t heard of Paul Krugman these days? The Nobel-winning Princeton economist and New York Times columnist has emerged as a key voice in American liberalism, and is berated by the right for his support of heavy fiscal stimulus, higher inflation and a strong social safety net.

Which makes the views espoused in a 1997 missive entitled “In Praise of Cheap Labor” rather surprising. In the article, the economist attacks opponents of globalization for their soft-hearted distaste for inhumane labor conditions in developing countries.

Such moral outrage is common among the opponents of globalization – of the transfer of technology and capital from high-wage to low-wage countries and the resulting growth of labor-intensive Third World exports. These critics take it as a given that anyone with a good word for this process is naive or corrupt and, in either case, a de facto agent of global capital in its oppression of workers here and abroad.

But matters are not that simple, and the moral lines are not that clear. In fact, let me make a counter-accusation: The lofty moral tone of the opponents of globalization is possible only because they have chosen not to think their position through. While fat-cat capitalists might benefit from globalization, the biggest beneficiaries are, yes, Third World workers.

Krugman did not respond to requests for comment.

Perhaps he can answer just this question: Aren’t the problems of high U.S. unemployment and stagnant wages that he so often bemoans a natural consequence of his own earlier logic that, for developing country workers, “bad jobs at bad wages are better than no jobs at all”?

Fiscal cliff could help U.S. avoid road to Japan – but probably won’t

The “fiscal cliff” is widely seen as a massive threat looming over a fragile U.S. recovery. But with a little imagination, it is not difficult to see how the combination of expiring tax cuts and spending reductions actually presents an opportunity for tilting the budget backdrop in a pro-growth direction, even if political paralysis makes this scenario rather unlikely.

For Steve Blitz, chief economist at ITG in New York, the cliff presents a unique chance for the United States to avoid sinking deeper in the direction of Japan’s growth-challenged economy by shifting incentives away from consumption and towards investment:

If current negotiations end up simply turning the “cliff” into a 10-year slide an opportunity to help the economy regain a dynamic growth path and close the gap with pre-recession trend GDP would, in our view, be lost and raise the odds that, in the coming years, U.S. economic performance looks more like Japan’s. […]

Deciphering the Fed: Guideposts for progress on jobs

The Federal Reserve’s open-ended bond-buying stimulus announced last month was coupled with a promise to continue purchasing assets “if the outlook for the labor market does not improve substantially.” Central bank officials are expected to continue discussing what parameters they will take into account to define such progress, but are not expected to come to any hard and fast decisions just yet.

In a research note entitled “What the Fed didn’t say: Payrolls at 160K,” Torsten Slok, economist at Deutsche Bank, offers a few guideposts:

In terms of what the Fed will be looking at, we reckon that employment growth will be first among equals – in particular nonfarm payrolls. We estimate that the FOMC’s economic and policy projections are consistent with payrolls averaging gains of around 160,000 per month through mid-2015, when they have told us they expect the exit process to begin to get under way. There is a range of uncertainty around this estimate. But if the numbers are coming in well below that rate for a number of months (100k or less), look for the Committee to extend the mid-2015 date and possibly step up its QE purchases, and expect just the opposite if they are coming in well above that rate (200k or more).

Why rise in part-time employment does not explain U.S. jobless rate decline

The September unemployment rate was the lowest since December 2008 after surprisingly large back-to-back declines, sending economists back to the drawing board after big forecast misses. Some pointed to the large increase in involuntary part-time employment – erroneously so, according to an analysis from Ray Stone, economist and managing director at Stone & McCarthy.

The jobless rate fell to 7.8 percent last month from 8.1 percent in August.

After a quick, superficial look at the September household data, several commentators embraced the thesis that it was due to a 582,000 increase in Part-Time Employment for Economic Reasons. These are people who prefer full-time employment, but sadly had to settle for a part-time job. These 582,000 part-timers accounted for much of the overall 873,000 increase in September civilian employment.

This Part-Time for Economic Reasons statistic “was a Greenspan favorite, and certainly over longer periods of time such is a measure of labor distress,” Stone said. “But, the month-to-month wiggles in this series usually turn out to be noise. In September this metric rose to 8.613 million.”

Early hints of stronger unemployment numbers – that Wall Street economists missed

As traders and economists hash over the sharp and unexpected drop in the U.S.jobless rate to 7.8 percent, they might do well to review some key data points that offered early hints that at least some households were seeing improvement in the labor market. Wall Street analysts in a Reuters poll had forecast a rise in the unemployment rate to 8.2 percent.

Even as big companies were laying off more workers or at least holding back on hiring, The Conference Board’s consumer confidence data showed workers felt more encouraged about finding jobs. The Thomson Reuters/University of Michigan survey depicted a late summer upturn in consumer mood even as gasoline prices remained high. The latest ADP report, with all its perceived flaws, indicated a consistent, moderate acceleration in hiring among small- and mid-sized companies since late spring even though big firms seemed reluctant to expand their payrolls.

The graph below shows confidence improving as job prospects brighten.



 

 

Attempting to measure what QE3 will and won’t do

Deutsche Bank economists have tried to quantify what effect QE3 is likely to have on the U.S. economy. For an assumed $800 billion of purchases of both agency securities and Treasuries through the end of next year, the economy gets a little over half a percentage point lift over the course of two years and a net 500,000 jobs – or about two months’ worth of job creation in a typical strong recovery from recession.

In a model-driven assessment based on the past impact of QE1 and QE2, Deutsche Bank Securities chief economist Peter Hooper says this is what the Federal Reserve printing another $800 billion — slightly less than the gross domestic product of Australia — will do:

1. Reduce the 10-year Treasury yield by 51 bps

2. Raise the level of real GDP by 0.64%

3. Lower the unemployment rate by 0.32 percentage points

4. Increase house prices by 1.82%

5. Boost the S&P 500 by 3.06%, and

6. Raise inflation expectations by 0.25%

Apart from the fact we are more likely to win a lottery jackpot of epic proportions than see all of those predictions come true to that degree of precision, the pressing question is whether a 0.32 percentage point reduction in the unemployment rate would be significant enough for the Fed to stop printing money. After all, the Fed tied whether or not it would be satisfied by the results of QE3 to a substantial improvement in the labour market.

U.S. recession signal from the Philly Fed

Will the U.S. economy continue coasting along at a slow but steady clip or does it actually risk tipping into a new recession? Tom Porcelli, economist at RBC Capital, says he’s concerned about a new trough from a little-watched Philadelphia Fed survey of coincident indicators.

Here’s another indicator flashing red. The three-month trend for the Philly coincident index (which captures state employment and wage metrics) fell to a fresh cycle low of +24 in August – it was +80 just three months ago.

A reading this low historically bodes ill for future economic activity. Looking back at the last five downturns, this index averaged +41 three months prior to the official start of the recession. We have decidedly crossed that threshold.

Not enough jobs? Blame the government

The U.S. labor market has been adding jobs for two-and-a-half years, helping bring down the jobless rate from a peak of 10 percent in late 2009 to the current 8.1 percent rate. But recently, job growth has slowed to under 100,000 per month – not enough to keep the jobless rate on a downward path. Heidi Shierholz at the liberal Economic Policy Institute in Washington says this leaves the U.S. economy well short of achieving its full capacity:

We’d need to add around 350,000 jobs a month to get back to the pre-recession unemployment rate in three years.

With just 96,000 jobs created in August, we’re still a long way off from that kind of strength – and a steady flow of job losses from the public sector isn’t helping. State and local governments have been slashing public payrolls to balance their budgets. In August, the public sector lost 7,000 jobs, but that was mere drop in the bucket of public sector job losses that now total 680,000 lost jobs since August 2008. The total impact is even larger, says Shierholz.

Help not wanted: U.S. online job ads see biggest two-month decline since recession

U.S.job seekers saw online job ads dwindle this summer, according to a survey from The Conference Board. Advertised vacancies fell 108,700 in August to 4,684,800, the industry group said.

Jonathan Basile at Credit Suisse noted that the combined drop of 262,000 jobs for July and August was the biggest two-month decline since the last recession.

This measure of labor demand suggests businesses have become a lot less willing to hire in the last two months. Jobless claims in recent months are not showing a deteriorating picture for the layoff side of payrolls, but help wanted online ads are showing weakness on the hiring side.

Fewer firings do not mean more hirings

Jobless claims fell unexpectedly last week to 361,000. Analysts were particularly heartened by the improvement because the latest figures were finally “clean” of recent seasonal adjustment quirks related to auto factory shutdowns. That’s the good news.

Some lingering cause for hesitation: Eric Green at TD Securities reminds us that recent dips in claims have not necessarily translated into great bursts of new job creation.

Over past periods of this recovery claims at this level have been consistent with (monthly) job growth closer to 200,000. With claims back at these levels, one cannot presume that this will continue to hold given the level of uncertainty and slower growth momentum from which labor demand will lag.