Arnold Kling  

Bernanke on the Jobless Recovery

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Federal Reserve Board Governor Ben S. Bernanke offers his views on current issues in macroeconomics. He points to research which suggests that the household survey of employment, which shows a stronger labor market than the payroll survey, may be misleading. That is because the household survey has to be "multiplied up" by a factor that reflects the assumed ratio of population to the survey. If population is over-estimated--and this may be the case--then employment will be over-estimated.

Overall, Bernanke takes the view that the labor market is weak.


Indicators of labor market underperformance include (1) the unemployment rate, which remains 1.9 percentage points above its level at the March 2001 peak of the business cycle; (2) a significant decline in labor force participation, particularly among younger workers; (3) the rising share of the unemployed who have been out of work six months or more; (4) the relatively slow decline in initial claims for unemployment insurance, as well as in continuing claims (though both of these have improved a bit lately); (5) the fact that the Conference Board's index of help-wanted advertising remains below the level of the recession trough; and (6) the relatively pessimistic views about prospects for the labor market revealed in surveys of both employers and workers.

Of the possible explanations for the weak labor market, Bernanke believes that strong productivity growth is probably the most significant. He suggests that this is a positive development, because it leaves room for continued strong economic growth with low inflation.

Thanks to Stephen Kirchner for the pointer.

For Discussion. How would we be able to tell if Bernanke's optimistic view of aggregate supply is wrong?


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CATEGORIES: Macroeconomics



COMMENTS (35 to date)
Steve writes:

I know Econonomics isn't football, but tomorrow is the superbowl. Anyone care to guess at the employment numbers?

Even though I am an overall pessimist, I realize that the "consensus" is ALWAYS wrong at the bottom and at the top, so therefore I am predicting 100,000 additions to payroll on the employment report.

Anyone else care to guess?

Steve writes:

--> (5) the fact that the Conference Board's index of help-wanted advertising remains below the level of the recession trough;

Lawrance George Lux writes:

Bernanke misreads the possibility of Inflation drastically, what with the increased Government deficits-at all three levels of American Government. Government expenditures, while assisting Transportation and Construction, draft resources from Production-producing industry. When they do this without paying for such expenditures by taxation, they create artifically high Resource pricing for the Production-producing industries. Inflation is nothing but an axe ready to fall on all of Us.

There is great structural change occurring in all American industries, where there is outsourcing to cheaper labor, or reduction of labor hours utilized in Production through technological capitalization. This is facilitated by the Bush Tax Cuts, which allows Business and Corporate interests to replace an uncertain Cost (Labor), with a previously-purchased or mortgaged (Set) capitalization Cost.

The real factor here is not the 'Downsizing of Jobs', but the 'Downsizing of Real takehome Pay of Labor'. The continued rate of growth is matched by a continued rate of increase in mortgaging that growth, through Consumer Credit and high level Housing mortgages. Financial instruments and Credit Card companies cannot even retain interest rates at present (rising slowly), when the rate of repayment starts to drop.

There may be one more Christmas Season where the Bush administration can crow about an expanding Economy, but I don't see it. lgl

Steve writes:

Lawrance--

Why are TIPS so expensive (yields so low) if there is "massive inflationary risk"? What on Earth could cause this "massive inflationary risk" if workers are getting screwed out of pay by offshoring? I'm certainly not going to leave my company if they choose to freeze salaries. Isn't that what you academics belive causes inflation?

Yes, I know "too much cash chasing too few goods", if this was really the only thing that causes inflation, why raise rates when unemployment drops "too low"?

Eric Krieg writes:

Hey Steve, todays employment numbers were brought to you by the number 127,000 and the letter W.

Eric Krieg writes:

Would Bernanke be one to keep the monetary accelerator to the floor for an extended period of time?

The thing that freaks me out about the Federal Reserve is that they are already talking about RAISING rates, to prevent an inflation that isn't even on the horizon yet.

I hope the views of Bernanke indicate that he is not going to vote to raise rates anytime soon.

Steve writes:

I said earlier that they would be above consensus, but that's not because of "W". (I read them as 126,000, but whatever).

The thought that the fed would raise rates in my lifetime is scary.

Eric Krieg writes:

>>I said earlier that they would be above consensus, but that's not because of "W".

Mmm hmm. Yeah, you know, the fact that the supply siders are always right is just a coinky dink.

>>(I read them as 126,000, but whatever).

What's a 1000 jobs between friends?

>>The thought that the fed would raise rates in my lifetime is scary.

Yeah, it's just preposterous. There is still a group out there that believe that economic growth in and of itself is inflationary. They see things like increased commodity prices and go ballistic.

Never mind that those commodity prices are off of HISTORIC lows.

The fact that some of these true believers might be on the Fed board is frightening.

Eric Krieg writes:

So Steve, you said that today was the economic Superbowl. Did the Cowboys crush the competition once again?

Is it a coincidence that Dubya and the Cowboys are both from Texas?

Lawrance George Lux writes:

Steve and Eric,
The Inflation which is being generated is a Resource price pushed Inflation. Check your Utility and other Need bills. This is not the real place to check for the real cost of this Inflation. You check raw material price increases on the Raw Materials market. A increase overall here of 1%, generally will result in a Finished Product price increase of 3.8% overall. I do not have the organization for advanced study at Present, but I estimate Government deficit spending--Federal, State, and Local--has raised Raw Material overall prices by 3%.

Do not worry about the Fed. They will not actually raise Interest rates effectively, until the Banks themselves have already done so; probably when the Inflation rate is already 8%. lgl

Steve writes:

Yes, yes, yes, Eric... But, one good jobs report does not a supply-side vindication make.

The fact that we've been deficit spending like drunken sailors (classic Keynsian recession warfare) has NOTHING to do with the jobs report? It's ONLY because "W" gave away our children's future to the $200k+ crowd that a few people got more jobs this past month?

Arnold Kling writes:

I would have made a bet on higher employment numbers. I think that the best news is ahead of us on that front.

I don't agree that the good news was brought to us by the letter W. My point is not to criticize the President's policies. Instead, it is to continue my crusade against attributing business cycle movements to Presidential policies.

It's fine if the rooster wants to crow at dawn. He just shouldn't believe that he makes the sun come up. W didn't create those jobs. By the same token, I don't think he's the one who lost all the jobs during the recession.

Steve writes:

Presidents can't really help employment (except in the case of having a "make work" program of some sort). They can really only help create an environment that is able to make jobs on its own. I know W has done that, the question is "in what country???" Surely, his policies have helped China and India, not to mention a few new Iraqi Haliburton employees.

I agree that good things are head, I wish no ill will on the big experiments of supply side economics and globalization. I surely hope they work, because W has bet the whole country on it.

Thanks for having this blog, arnold. I really enjoy it!

Steve writes:

Obviously, I meant to say "good times are ahead".

Bob Dobalina writes:

"There is still a group out there that believe that economic growth in and of itself is inflationary. They see things like increased commodity prices and go ballistic."

Hey, Eric-- there are plenty of people who believe that easy credit and artificially low interest rates are inflationary. They're called Austrian Economists. And I think they make a damn good case.

Eric Krieg writes:

>>Hey, Eric-- there are plenty of people who believe that easy credit and artificially low interest rates are inflationary.

Bob, are you saying that those conditions exist now?

Anyway, the examples you give are indicators of MONETARY phenomonon. And that is EXACTLY what inflation is. You juice up the money supply too much, you get inflation.

But 7.2% GNP growth and 126,000 jobs created IS NOT in and of itself a leading indicator of inflation. Some people think that it is.

Bob Dobalina writes:

"Bob, are you saying that those conditions exist now?"

Yes.
http://prudentbear.com/bc_chart_library.html
http://www.ntrs.com/library/econ_research/weekly/
http://www.mises.org/freemarket_detail.asp?control=360
http://www.mises.org/fullstory.asp?control=876

Steve writes:

PrudentBear.com? They may have a little bit of an ulterior motive for claiming that the sky is falling (such as a huge investment in gold, large short positions, etc). They've been written up in BusinessWeek and a number of other places as a mutual fund for perpetual bears.

Can you trust a salesman's opinion on this?

Bob Dobalina writes:

Steve--

I linked to a bunch of charts, ferchrissakes.

Do you think they doctored the charts to sell more mutual funds?

And I think Kasriel and Roach (to whom I did not link) will suffer in a bear market, especially a rising-interest-rate bear market. Do you doubly weight their opinions?

Steve writes:

It's kind of funny, the one other one that I read from your list of links actually quotes prudentbear.com! Do they all rely on Tice for everything "Bear"?

I'm sure you're right that things are overinflated right now. Just think about the Fischer equation (I think?) Inflation=M3&2growth-GDP growth? something like that?

Stephen Roach is a bear because that's what gets him quoted, certanly doesn't get high marks for appearance, he has to go for the scary "sky is falling" speaches. Everyone has a motive out there. No, they didn't maniupate the numbers/graphs/etc, but they are ignoring a great many good things that are out there.

Eric Krieg writes:

Bob, when you are being "out-optimist-ed" by Steve, you have a real problem.

I think that a good many Americans would like to have an inflation problem right now. It has been a generation since we had any inflation, and some of us have forgotten what it feels like (in my case, I NEVER even felt it in the first place, I'm too young).

Steve writes:

good points, Eric. :) Bob:welcome to the dark side.

I'm not pessimistic about the Economy as a whole or inflation. I hope Bush gets social security privatized before the tide of populism sweeps him out of office.

I just want to see better employment possibilities for technical folks who live in the states. GDP growth does not give me that, and inflation doesn't give or take that away.

Bob Dobalina writes:

Eric,

My thesis is simple--

1. The Fed has pumped tons of money into the system.
2. This glut of liquidity will eventually push rates upward.
3. When rates finally go up (I realize it could take another year to happen), asset prices (stocks, real estate, and (obviously) bonds) will fall-- in some cases, the quite dramatically.

Where do you see the breakdown in my reasoning?

Eric Krieg writes:

I find fault with No. 1.

Is there any evidence that the Fed is pumping markets full of money at a rate faster than the recent past, say 1999?

Rates react to inflation. There is no inflation. Thus, rates are not MUCH higher than they were in March, their 40 year low.

Now, rates will be going up, no doubt. Bonds are not the place to be when the stock market is going like gangbusters. Their price will fall, and rates will go up.

But don't bet on a crash. The rise in rates will be slow and orderly.

Boonton writes:

If there is a glut of money supply rates should fall, not rise. Asset prices will increase, not fall. & inflation will start to pick up.

Steve writes:

Sure, they pumped in tons of liquidity, but as we have established here, the money is being spread out globally this time and not just moved around in our borders.

I wonder if this will keep inflation from ever being a problem again? Maybe the fed put just the right amount into the system (even though it looks like a lot compared to prior recessions, it might turn out to be LESS than before as a % of global GDP?)

Lawrance George Lux writes:

Steve, Eric, and Bob,
Inflation has more to do with Government deficit spending at all levels, than it has to do with the Money Supply. Heavier imputs of Funds actually only lowers Production Profits, with transference of these Profits to financial instruments. This is not a bad thing, if these Profits are directed to hard capital construction or to Consumption. They are inflationary if they are re-directed to larger financial instruments. The real propellent of Inflation, though, remains Government deficits; this due to the Demand pressures on the Resource markets. lgl

Eric Krieg writes:

Bob, did you ready any of Friday's WSJ? The issue of rate increases came up.

The Bank of England raised rates recently, for no other reason than they see economic growth and worry that it will spark inflation.

And even today, there is talk that the Fed will raise rates (evidently there was an editorial in the Sunday NYT that got the ball rolling. What kind of person places financial bets based on what they read in the NYT?)

You should also go to econopundit.com and see what it has to say about the risk of inflation. There is a very good economic model that they use to predict many economic factors (the Fair Model), and it is NOT predicting inflation of any consequence.

Steve writes:

Guess when you open your workforce up to competition with 400 million unemployed people (India and China "surplus" workers) who will compete to the death to get $1/hour jobs it kinda puts a lid on inflation, regardless of how much liquidity the Fed pumps into the market.

Eric Krieg writes:

>>Guess when you open your workforce up to competition with 400 million unemployed people (India and China "surplus" workers) who will compete to the death to get $1/hour jobs it kinda puts a lid on inflation, regardless of how much liquidity the Fed pumps into the market.

Yes.

Seriously, one way (the ONLY way, really) to deal with soaring productivity growth and globalization induced displacements is to put the monetary foot to the floor.

One criticism with the European Monetary Bank is that is has kept rates high despite very high European productivity. The feeling is that the risk of inflation is nil, so why not keep interest rates low.

I would welcome rising interest rates if they were based on something more than the (wrong) feeling that economic growth causes inflation. If rates rise because of, say, ACTUAL INFLATION, I would be happy with it. I don't have confidence that this is the case now.

We should all be praying that Greenspan doesn't ake his marching orders from the New York Times, like most Democrats do.

Steve writes:

No, Eric--There are TWO ways. Protectionism is the other (easier) way out of this.

We can either choose to protect strategic interests and save certain industries (yes, while hurting some consumers) or we can have the dollar plummet in a very short period of time which will affect EVERY industry and EVERY consumer.

Eric Krieg writes:

>>we can have the dollar plummet in a very short period of time which will affect EVERY industry and EVERY consumer.

People have been predicting the dollars fall since 1984. It hasn't happened, despite very large trade and budget deficits over the last two decades.

A betting man might look at past experience as his guide. in doing so, betting against the dollar is not a bet you want to take.

Steve writes:

True, but did we have a 5% current account deficit any time in the past? Was their another currency with the chance at becoming the world's reserve currency like there is now in the Euro?

Say what you want about Buffet, but if he's betting against the dollar, it's hard to bet against him.

Eric Krieg writes:

>>True, but did we have a 5% current account deficit any time in the past?

Come on. Think, man. Do you remember the 1980s?

In 1984 alone, the US went from being the world's biggest creditor to it's biggest debtor. Federal budet defecits alone were at a much higher % of GDP than they are now. And before the Japanese voluntarily limited their exports to the US, they were taking a huge market share and their trade deficit makes China's today look piddling.

I'm telling you, if the dollar could survive the '80s, it can survive now.

As for the Euro, it is the yen of our generation! In the 1980s, the world thought that the yen would become the reserve currency. It hasn't. And neither will the Euro, because the underlying economy that supports the Euro is creaky and undynamic.

Steve writes:

I was 3 in 1980. so, "no" is the answer to your first question.

I'm arguing that our deficits (BUDGET deficit, that is) should be MUCH higher than they are, and much more stimulative. Check out http://www.levy.org. At least one of their whitepapers agrees with this idea. We have to inflate our way out of this crisis.

Yes, I know 7.2% growth last Q, WHO CARES? Q3 is over now!

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