Arnold Kling  

Two Puzzles of Current Macroeconomic Condition

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Relative to what a consensus forecast might have predicted last October, it appears that:

--Banks are doing somewhat better than expected
--GDP has fallen about as far as expected
--employment has fallen more than expected

If this is a fair characterization, it raises two puzzles.

1. If the bank bailouts worked at saving the banks, then how come we still wound up with such a severe recession?

2. Why is the severity of the recession so much greater in the labor market than in the goods market?

My answer to (1) is that the bailouts were only good for the banks, not for the economy as a whole. Of course, I was never a fan of the bailouts, so you might want to discount my answer as confirmation bias.

My answer to (2) is that we are superimposing a heterogeneous labor force on top of a trend of rapid productivity growth. In some sense, we are seeing an amplified version of what took place from 2001 through 2003. This was dubbed a "jobless recovery," but I called it a "productivity-cushioned recession." That is, growth in trend productivity of 2 to 3 percent per year is maintaining output higher than it would be if the trend were less than 2 percent. (Trend productivity growth is productivity growth measured over periods of five years or more, to iron out short-term fluctuations.)

The heterogeneous labor force means that it is very hard to reallocate labor from sectors that decline. Forty years ago, there were lots of industries that employed men with only a high school education. Today, there are fewer such industries, so that when the construction sector and the automobile sector shrink, the job losers have almost nowhere to go. These guys aren't going to turn into school teachers or nurses next month--or ever. It would be nice if the stimulus were actually creating construction jobs, but the reality is that the net increase in state construction projects is probably infinitesimal, as the states wind up juggling their budgets to keep Medicaid going.

Back when Bryan Caplan first proposed cutting the employer portion of the payroll tax, I jumped to support the idea as a way to maintain labor demand. I view (2) as evidence that Bryan's idea would have been the best stimulus. Again, you have to discount for confirmation bias.


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CATEGORIES: Macroeconomics



COMMENTS (8 to date)
manuelg writes:

Before crash:

* record profits for banks
* good profits for other sectors

Obama stimulus:

* good profits for banks
* other sectors, not so much

I wouldn't mind a formal mechanism for rewarding hiring and training with tax breaks providing a chance at profits. I am not holding my breath.

libfree writes:

That was the best option out there in my opinion. The most important thing was the speed that we could have gotten it into the economy. Instead we needed to do a grab bag of the Democratic wish list. Don't get me wrong, the Republicans would have probably done something as idiotic.

Neville writes:

It is surely relevant here that more and more jobs are being turned into entry-restricted modern versions of medieval guilds by increased regulation.

fundamentalist writes:

Another explanation as to why gdp has fallen less than employment is the highly stylized way that gdp is calculated. It includes no sales of used products such as used housing or cars. It measures only value added gdp, which cause it to make the consumer sector look twice as large as the capital goods sector. However twice as many people are employed in capital goods than in consumer goods manufacturing.

Depressions hit employment hardest in the capital goods sectors, and that gets recorded. But the same effect in gdp doesn't get reported because of the value added calculations in gdp.

Mr. Econotarian writes:

Also reducing hiring the the recent rise in the minimum wage (great idea at ~10% unemployment!) and the health care debate which may make companies have to spend more on employees to meet mandates (or may not, the uncertainty is bad, again not a great idea to make legislative sausage in a recession).

But in general, Arnold is correct. There is little future for the only-high school or less-than-high-school educated in the US. I think a major part of the "educational divide" is due to the haze of the drug war distracting kids from a desirable educational and career path.

There are other issues creating the educational divide, but I think ending the Drug War is the low-handing fruit.

Yancey Ward writes:

On the banks, didn't we stop forcing them to write down some of their assets, thus raising their relative profitability.

Gary Rogers writes:

I think I pretty much agree with Arnold's answer to numbber 1., though, I might rephrase it a little by pointing out that financial systems are infrastructure, and by themselves do not generate economic activity just as building a highway will not necessarily create traffic. However, the lack of a highway can keep trafic from flowing just like the lack of a financial system can stop commerce. At the cost of a couple trillion dollars, we now have the infrastructure working to Mr. Geithner's liking and we can start looking at rebuilding the economy.

The answer to the second question is a matter of where the stimulus money comes from and where it is spent. Most people take a far too narrow a view of economic stimuli and assume that the government can spend the money without looking at the consequences of where the money comes from. That is not realistic. Unless the government is sitting on a pile of reserves, every dollar that is spent on stimulus must be taken out of the economy someplace else. Some have likened this to bailing out a swimming pool by taking buckets and pulling water from the shallow end of the pool and pouring it back in the deep end, but it is a bit more complex than that. In fact, if there is a large pool of savings in the economy, borrowing stimuslus money domestically could have the desired pump priming effect because money that would otherwise be saved is diverted to consumption. On the other hand, if the stimulus money is needed for job creation capital, it does not seem surprising that borrowing this money would cause job creation to stagnate as the needed money is diverted to consumption. A third option is to borrow the stimulus money overseas, which hurts exports while promoting consumption. In any case, it is not surprising to see a jobless recovery given our current situation.

Our big problem now is finding a path back to a sustainable economy. We have already passed a trillion dollars in deficits this year and this level of borrowing plus the recent easy money policies will soon push interest rates up dramatically. I hate to say it, but our economy is not strong enough to handle the interest rates necessary to prevent inflation this time around. What was a severe recession in the 80s when we had a similar but less severe situation and interest rates climbed up to around 20% will be a severe depression if it happens today. I hope all the economists are taking notes, because we need some good leadership and, so far, economists have been slow learners.

Jim Hass writes:

Estonia has chosen to cut "contributions" to the mandatory pension plan, as a way to lower employment costs this summer in the context of a currency board . The hope is that this will help increase employment and "competetiveness" without a devaluation. Maybe you will have more data points to look at besides Singapore and its variations in the CPF.

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