Oh Boy

The more we study the labor market in the wake of the Great Recession, the weirder and more disturbing it gets.

First, we had a good employment and unemployment report last week: 236K more jobs (that’s a pretty good number), and the unemployment rate dropping to 7.7% as it continues a typically-paced downward crawl.

But, here’s the problem:

The number of multiple jobholders rose by 340,000 this month, to 7.26 million — a rise larger than the headline rise in payrolls. Which means that one way of looking at this report is to say that all of the new jobs created were second or third jobs, going to people who were already employed elsewhere. Meanwhile, the number of people unemployed for six months or longer went up by 89,000 people this month, to 4.8 million, and the average duration of unemployment also rose, to 36.9 weeks from 35.3 weeks.

This is really damning evidence that what we’re seeing is a breakdown in the labor market for certain people only.

Leave aside for a moment claims that some people have to work more than one job: that’s a diversion that you shouldn’t pay much attention to.

From the perspective of the employer, the marginal cost of employing a new person is the same whether they have zero, one, or more, jobs. And yet they are choosing the people who already have a job.

So what employers are telling us is that the marginal opportunity cost of hiring someone who already has a job is lower than the marginal opportunity cost of someone who does not have a job. This isn’t about money — it’s about all the pain in the a** characteristics that employees bring with them, and that employers agree to put up with when they hire someone.

Now return to the incentives to the applicant. Think about it: if they need a second job, is it possible for the marginal benefit of the second job to exceed that of the first job? Probably not. And what if they don’t have a job at all? You’d like to think there is a marginal benefit in moving from unemployed to employed (and I think that there is), but it clearly can’t be that large.

Via Marginal Revolution.

Sequester Graphic

I like the image at the top left, because it gives a good sense of the relative size of what’s cut and what’s not:

Note that there is some debate about whether the smallest black square should fall within the large brown square as shown here, or whether it should be lumped with the middle-sized black square. If you do the latter, the two black squares would be the same size (that’s the breakdown that I used in last week’s Powerpoint presentation).

The is from a piece entitled “”Cuts Roll In as Time Runs Out” which appeared in the March 1 issue of The Wall Street Journal.

Get Used to the EMU as a Source of Problems

Macroeconomic problems in the EMU are quiescent now; don’t get used to that — this is going to be in the news for your adult life (kind of like racism in the U.S. or violence in the Middle East).

A good primer on this is the interview entitled “Why the Euro Crisis Isn't Over” in the February 23 issue of The Wall Street Journal.

In macropolitics, there’s always a lot of fingerpointing about why people didn’t forecast this or that. The thing is, they usually did:

… Bernard Connolly foretold the misery that awaited the European Union. Given that he was an instrumental figure in the EU bureaucracy and publicly expressed his doubts in a book called "The Rotten Heart of Europe," he was promptly fired. Mr. Connolly takes no pleasure now in having seen his prediction come true. And he takes no comfort in the view, prevalent in many quarters, that the EU has passed through the worst of its crisis …

The first solution is the one used in the U.S., the second one is what Italy is leaning towards:

Two immediate solutions present themselves, Mr. Connolly says, neither appetizing. Either Germany pays "something like 10% of German GDP a year, every year, forever" to the crisis-hit countries to keep them in the euro. Or the economy gets so bad in Greece or Spain or elsewhere that voters finally say, " 'Well, we'll chuck the whole lot of you out.'

Maybe he knows what he’s talking about:

In 2003 … Mr. Connolly described the U.S. economy as a debt-driven Ponzi scheme and predicted that interest rates would have to fall even further in the next cycle to keep the scheme going.

As per usual, politicians and the media focus too much on the symptoms:

… "both the sovereign-debt crisis and the banking crisis are symptoms, not causes. And the underlying problem has been that there was a massive bubble generated in the world as a whole by monetary policy—but particularly in the euro zone" by European Central Bank policy.

…

"And what kept the stuff flowing in," Mr. Connolly says, "was essentially the belief, 'Well, yes, there is a high rate of return in construction.' " That in turn depended on "ongoing expectations" about house appreciation "that were in some ways not dissimilar to what was happening to the United States in the middle of the last decade. But it was much bigger."

How much bigger? "If you scale housing starts by population, then the housing boom in Spain and Ireland was something like three or four times as intense as the peak of the boom in the U.S. That's mind boggling."

And here’s what I want you to think about. Several times this semester I’ve pointed to the problem with long-term unemployment in the U.S. In Europe, the problem is countries that aren’t competitive, in the U.S. the problem is groups within the labor force that aren’t competitive. So, consider this quote, and draw an analogy between how it talks about countries within Europe, and how we should talk about some workers in the U.S.

That torrent of money drove up wages far faster than productivity improved, while cheap borrowing led to major deficit spending. After the 2008 financial panic, the bubble inevitably burst.

So what's needed now is not simply a fiscal retrenchment, or even a retrenchment along with banking reform. Wages and prices have to adjust to something like their pre-bubble trends, Mr. Connolly says, to make these economies competitive again.

If it’s correct to draw this analogy, then the U.S. is doing fiscal retrenchment (and it won’t be enough) with banking reform (which won’t be enough) because the bubble was in the real wages of people tied to the construction, housing, and real estate finance sectors.

More On Sequestration

Peter pointed out a front page piece in the February 27 issue of The New York Times entitled “Austerity Kills Government Jobs as Cuts to Budgets Loom” that made just about the same points I’d made in Monday’s lecture.

… Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years.

The above point is not making any claims about the multiplier, just pointing out that from an accounting perspective, government spending on the stuff that counts (in a Keynesian sense) is down about 7%. In turn, that is about 20% of the U.S. economy, so spending is contributing to about a 2% drop in real GDP (see Section1, Table 1.1.6).

As always, they have an informative chart (copy shown above). Note that the last time the Republicans went through with something like this is shown in 1995 … in large measure, that increase Clinton’s popularity prior to his reelection.

Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.

Here’s a chart of government employment relative to the previous peak of the business cycle (copy shown above).

That amount corresponds to adding about 0.4% to the unemployment rate. Here they make the same point I’ve made a few times in class (they just don’t have the guts to call it the Obama bait-and-switch like I do ;)

Total government spending continues to increase, but those broader figures include benefit programs like Social Security. Government purchases and investments expand the nation’s economy, just as private sector transactions do, while benefit programs move money from one group of people to another without directly expanding economic activity.

…

… sequestration mostly spares Medicare and Medicaid, the health care programs that are the primary reason federal spending is projected to increase.

Then they quote Tyler Cowen (a professor from George Mason University, who blogs at Marginal Revolution, and writes a column for The New York Times):

“People focus on the upfront cost and they don’t think through the whole timeline,” said Tyler Cowen, an economist at George Mason University and an occasional contributor to the Sunday Business section of The New York Times. “You have to cut spending within the next 10 years anyway. It may be time to take some lumps.”

I find nothing wrong with that view. I think sequestration is dumb along many dimensions and useless along others … but I have no trouble with beginning to end the charade that government does much other than write checks.

Italy and Its Election

The Eurozone crisis (see here, here, here, here, or here) has settled down a bit over the past year, but none of the fundamental problems have been solved.

Italy is the 3rd largest economy (of the big three) in the Eurozone, and the biggest of the PIIGS that are in difficulty. In short, if Italy gets worse, it will be a much bigger problem than Greece has been … and Greece’s problems have been big news for a couple of years now.

Italy’s general problem is similar to other developed economies, they’re just further along: an aging population has voted itself too much entitlement spending, and the government is having trouble financing that. Italy’s specific problem is that it is far more difficult to fire workers there than in other countries.

Fourteen months ago, Italy formed a new government with an economist, Mario Monti, at the top (yeah). But this probably will just give economists a bad name, since the economic problems are a symptom with political causes: Monti replaced Berlusconi, a sleaze who retired to face his many corruption charges.

More importantly, Monti is more a creature of the European Union government in Brussels, since he has held positions with them since the early 90’s.

Anyway, Italy has a parliamentary system: imagine if America had no presidential elections, but the majority party in Congress was allowed to choose the president (usually called a prime minister in a parliamentary system) and cabinet. Italy also has more than 2 political parties, and they come and go more frequently, so coalitions of larger minority parties usually end up hammering out a new government.

Italy just had an election. It was widely seen as a referendum on the reforms instituted by Monti to improve Italy’s ability to be a stabilizing rather than destabilizing part of the Eurozone. These included higher taxes (particularly taxes on the not-very-liquid wealth held in the form of family homes), efforts to make the labor market more flexible, and an increase in the retirement age.

Monti’s party lost. In fact, he came in fourth out of four. Worse, he came behind Berlusconi (reappearing like a bad penny) and an instigator named Beppe Grillo.

Grillo is widely reported in America to be a comedian. This isn’t quite right. He is an older sitcom actor, who got political and was banned from Italian TV (no doubt the politicians got him censored): think a combination of Tim Allen and Jon Stewart. His blog is widely read (English version). His politics are primarily “throw them all out, they’re all crooks and bums.” So, he’s a combo of Tim Allen, Jon Stewart, and Ross Perot.

It isn’t clear how this is all going to turn out. What is clear is the analogy: the Eurozone is like a dysfunctional family in a reality TV show, Italy tried to clean up its act, and it just checked itself out of rehab. Stay tuned for trouble.

UPDATE:

Italians born in 1970, who are about 43 now, will pay 50% more in taxes as a percentage of their lifetime income than those born in 1952, according to research from the Bank of Italy and the University of Verona. The research also found they will receive half the pension benefits that Italy’s 60-somethings are getting or are poised to get.

No wonder they want to throw the bums out.

Via Marginal Revolution quoting an article entitled “'Lost Generation' Feels Italy's Fiscal Squeeze” from The Wall Street Journal.

Brooks On Sequestration

David Brooks gets cynical:

… Politicians in both parties are secretly discovering that they love sequestration now. It allows them to do the dance moves they enjoy the most.

Democrats like the idea of a sequester (after all, it was their proposal back in 2011 that is coming due this week):

Democrats get to do the P.C. Shimmy. Traditional presidents go through a normal set of motions: They identify a problem. They come up with a proposal to address the problem. They try to convince the country that their proposal is the best approach.

Under the Permanent Campaign Shimmy, the president identifies a problem. Then he declines to come up with a proposal to address the problem. Then he comes up with a vague-but-politically-convenient concept that doesn’t address the problem (let’s raise taxes on the rich). Then he goes around the country blasting the opposition for not having as politically popular a concept. …

Republicans like it too:

Republicans also secretly love the sequester. It allows them to do their favorite dance move, the Suicide Stage Dive. …

In this dance, the Republicans mount the stage and roar that they are about to courageously cut spending. In this anthem they carefully emphasize cuts to programs the country sympathizes with, such as special education, while sparing programs that actually created the debt problem, like Medicare.

Then, when they have worked themselves up into a frenzy of self-admiration, they sprint across the stage and leap …

Brooks nails the Republicans and the sequester:

… Voters disdain the G.O.P. because they think Republicans are mindless antigovernment fanatics who can’t distinguish good government programs from bad ones. Sequestration is a fanatically mindless piece of legislation that can’t distinguish good government programs from bad ones.

And, oh yeah … don’t forget it was proposed by the Democrats.

It doesn’t matter much though, since no one in D.C. is getting to the heart of the problem:

… What’s America’s biggest problem right now? It is that business people think that government is so dysfunctional that they are afraid to invest and spur growth. So what are the parties going to do? They are going to prove that government is so dysfunctional that you’d be crazy to invest and spur growth.

From Brooks’ February 22 column in The New York Times, entitled “The D.C. Dubstep”.

FWIW: Someone leaned on Brooks after this column was published in print. Online there is a correction that sounds like an apology to the Obama administration.

Herbalife

This post is not required for class. I provide it because it may be of interest to those whose curiosity was piqued by our class discussion of Ponzi/pyramid schemes, Bernie Madoff, and affinity fraud. For better or worse, multi-level marketing is bigger in Utah than in other places, and multi-level marketing is often associated with both Ponzi/pyramid schemes and affinity fraud.

Anyway, the supplement maker Herbalife is publicly traded. Late last year, a whale of a private investor shorted* Herbalife stock, and began a publicity campaign arguing that it was a pyramid scheme whose stock value would soon fall.

If you’re interested, you can read more in “Let Herbalife Customers Decide” in Holman Jenkins weekly column, from the February 20 issue of The Wall Street Journal.

* Shorting is when you borrow shares of stock (rather than money), and then sell them. In essence, you are betting that the stock price will fall, so that you can buy the shares back at a lower price, and then repay off the loan.