More Growth Needed
Paul Krugman posts a chart illustrating that 3.5 percent growth is not going to result in a rapid fall in the unemployment rate:
Ryan Avent offers more context:
And consider this: the last time the unemployment rate hit its current level was during the recession of 1981-1982 (during which the unemployment rate actually peaked at 10.8% during the final quarter of the recession). Here are the quarterly growth rates for the six quarters immediately following the end of that recession: 5.1%, 9.3%, 8.1%, 8.5%, 8.0%, 7.1%. And at the end of that period, the unemployment rate was still above 7%.
As he says, this implies that even if worried about the sustainability of the Q3 growth pattern prove misguided and we can keep growing at 3.5 percent, “American unemployment will remain near 10% through the end of 2010, at least.”
Two points: One is that incumbent members of congress need to get their heads out of the sand and recognize that they’re likely to be kicked out of office by angry mobs if this comes to pass. A lot of politicians and political operatives in DC are very impressed by polling that shows people concerned about the budget deficit. I think it would be really politically insane for people to take that too literally. If congress makes the deficit even bigger in a way that helps spur recovery, then come election day people will notice the recovery and be happy. If, by contrast, the labor market is still a disaster then people will be pissed off. It’s true that they might say they’re pissed off at the deficit, but the underlying source of anger is the objective bad conditions.
The other point is that we’re largely at the mercy of the Federal Reserve here. And this worries me. Ben Bernanke is a good economist with a good reputation. He’s also a conservative Republican appointed to his job by George W. Bush after loyal service in a previous government job to which he was appointed by George W. Bush. It seems extremely plausible to me that a scenario in which the US experiencing three years of modest economic growth, high unemployment, rising productivity, flat wages, rising corporate profits, and GOP election victories is one he’d consider just fine.
30 Responses to “More Growth Needed”
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October 30th, 2009 at 12:17 pm
Thanks for ruining my day ….
October 30th, 2009 at 12:24 pm
A couple thoughts.
1. A job insurance program, which costs abut $35-40 billion per million jobs created, could knock down unemployment quite handily without adding to the long-term deficit.
2. It’s really quite amazing to think about the power that the U.S government denies itself through the forced separation between the Executive Branch and the Fed. Through the various bailouts and rescues, the Fed created trillions of dollars – and there’s no prima facie reason why the Fed couldn’t just have given a tiny fraction of that money to the Federal government for a jobs program. Given that there are about 15 million officially unemployed, you could easily get unemployment down to 4% with just $360 billion if you did it through a jobs program.
October 30th, 2009 at 12:28 pm
Why would Bernanke care what Bush though now? It’s kind of like someone warning that Earl Warren seems to be making good rulings, but watch out he was appointed by a republican.
October 30th, 2009 at 12:29 pm
It’s really quite amazing to think about the power that the U.S government denies itself through the forced separation between the Executive Branch and the Fed.
Is that really a power you want to give some future Palin administration?
October 30th, 2009 at 12:35 pm
Other than guilt by association, I have seen no evidence Bernanke is conservative or partisan. A lot of economists were surprised to find out he was even a Republican.
October 30th, 2009 at 12:42 pm
MY “The other point is that we’re largely at the mercy of the Federal Reserve here.”
WARNING: Hypothetical
What would happen if Krugman had the Fed chair? It seems to me that instead authorizing mass capital flows out of the country Krugman would insist that all capital flow out TO the country.
I can see the Professor sitting in his bathtub (ala Alan Greenspan) around the year 2025, relaxing and reading the NYT, not bothering to go to work today because everything is running so smooth. There is simply nothing for the Kruger to do -but luxuriate.
Seriously, Matt, Bernanke offers to resign all the time. Why don’t we take him up on it?
October 30th, 2009 at 12:50 pm
incumbent members of congress need to get their heads out of the sand and recognize that they’re likely to be kicked out of office by angry mobs if this comes to pass
Seriously, it’s this type of stuff that really makes you question the value of public opinion polling. First we have 8 years of the deficit skyrocketing, then a democrat takes office, and magically everyone is concerned about the deficit.
It seems completely obvious that when people are unhappy, or concerned, about the current state of affairs, they quickly pick up on what keywords serve as appropriate ways of expressing that concern. For most people, concern over “the deficit” is just a proxy over concern that the economy sucks and also they’re nervous about health care reform. If those things go well, the concern will go away. If they go badly, people will just pick up on new things to worry about.
It would be interesting to know, for a given public opinion poll, how good a predictor ones answers to a few key questions are for the rest of the poll.
October 30th, 2009 at 12:55 pm
Everything I’ve seen or read has lead me to believe that Bernanke is the type of economist that really cares about unemployment. Unfortunately, the Fed’s main tool for creating employment is to lower interest rates. But, we’re already at the zero bound. Sure, the Fed can continue doing some of its more wacky things with the assets side of the balance sheet, but those methods don’t give you much bang for the buck.
In short, I truly believe Bernanke takes unemployment serious and would love to do more to lower it, but there isn’t really much more to do from the Fed’s perspective. (Of course, if they give in to the monetary hawks and raise rates, it’ll be a sign that I’m wrong and he doesn’t care much about unemployment).
The whole “he was appointed by a Republican” thing doesn’t concern me.
October 30th, 2009 at 1:00 pm
The other point is that we’re largely at the mercy of the Federal Reserve here.
MattY really needs to stop repeating this canard.
If we are concerned about unemployment, it should be clear that the Fed has nothing to offer. Increasing available credit is pointless if people have no job and therefore can’t borrow.
We need direct job creation and that takes action by Congress and Obama.
October 30th, 2009 at 1:01 pm
It unfortunate to have to revisit this repeatedly.
On point one, the central “weirdness” regarding American politics is that so little can be accomplished in Washington because of the US Senate, in which the “Surf & Turf” coalition is the marginal player. This coalition markedly distorted the stimulus, blunting its pump-priming effect.
On point two, Bernanke is not a “good economist with a good reputation.” Bernanke is a top-in-class economist who has been applying, with very good effect since the start of the GFC, many of the novel monetary policies about which he has written for over 20 years. For what we have faced over the last two years, you would be hard pressed to find someone with better training and frankly judgment. (And, yes, Bernanke shares some blame for following the lax monetary and regulatory policy that was the hallmark of Greenspan under Bush.)
The greater threat is not the FOMC (not solely Bernanke, BTW) tightening monetary policy, despite your belief that Bernanke wouldn’t be troubled by an L-shaped recovery. The greater threat is the very real possibility that this country has reached the point where it cannot adopt policies because one chamber of the US Congress is so undemocratic.
You have written frequently on the filibuster. I suggest you pay greater attention to that than to your musings on the short bald Jewish economist who has done yeoman’s work to preserve your trustfund.
October 30th, 2009 at 1:03 pm
Exactly.
October 30th, 2009 at 1:08 pm
I’m honestly starting to wonder whether MY ever took an undergraduate economics course. He would have been forced to use Mankiw’s introductory text, but even it discusses things like the ISLM framework and the difference between monetary and fiscal policy. This post has all of the qualities of a Megan McArdle post on economics.
October 30th, 2009 at 1:13 pm
I don’t expect to see a big run-up in employment when so many companies have spent 20 years sending production overseas to lower-wage territories. That’s a huge drag on the growth of employment. The housing boom was great for American workers because it kept jobs here, but that wasn’t sustainable. So maybe we’re going to be stuck at 10% unemployment for a while.
October 30th, 2009 at 1:14 pm
JMO – yes, because then, we would be able to hold the Federal government responsible for our economic wellbeing and they’d have the tools they’d need to shape it. It would be up to the Palin Administration to provide strong economic performance or not, and the voters would have an referendum on their performance as stewards of the economy.
ron – While I agree that direct job creation requires Congressional action, I would still point out that the Fed could be doing a lot more to finance job creation than it is doing now.
October 30th, 2009 at 1:21 pm
I think it’s a moot discussion: There’s nothing Congress could do that would make a big enough impact to change public perception in time. Even if there were some fantastic program that works, by the time it starts working, it will be too close to the 2010 elections to become part of the national meme. If the economy continues to recover, Democrats will do OK. If it stumbles, they’ll take a big hit regardless of the actions they take in the next few months. Which is to say, don’t do anything now unless it’s going to help in 2012, not 2010.
October 30th, 2009 at 1:26 pm
I would still point out that the Fed could be doing a lot more to finance job creation than it is doing now.
I’m curious as to how that would work and why financing job creation is relevant if there is too little job creation to begin with.
October 30th, 2009 at 1:27 pm
I’m a fan of Bernanke too because he saved our bacon. He’s sort of the Robert Gates (who Bush picked too) of economics and gives credibility to Obama’s bipartisanship.
However Fed independence isn’t sancrosanct and if he started flaking out (as Greenspan did his entire career) then by all means we should go after the Fed.
He does need to get behind financial reforms more.
But Matt’s larger point is right that even if the Democrats get a health care bill and even if the Repubicans suck, 10% unemployment will kill them at the polls.
And it will be the Surf & Turf folks fault not Bernanke’s.
October 30th, 2009 at 1:55 pm
ISLM: your point is well taken, but how would you feel if Bernanke started raising rates in 2010? He’s done a great job so far, but then the interests of the rich and middle classes were aligned. Inflation and low unemployment is good for the middle class but not for the rich. And the noise coming from various quarters is worrisome. Do you think raising rates is the right policy or do you think Bernanke is not likely to do so?
October 30th, 2009 at 2:07 pm
It seems extremely plausible to me that a scenario in which the US experiencing three years of modest economic growth, high unemployment, rising productivity, flat wages, rising corporate profits, and GOP election victories is one he’d consider just fine.
Simply asserting this is incredibly unconvincing. What Fed policies over the next few years would support this thesis? And what evidence is there that the Fed intends to pursue those policies? The monetary spigots are open about as wide as they can go: right now, I’m much more worried about whether Congress will draft and pass the second stimulus that we obviously need.
October 30th, 2009 at 2:41 pm
The other point is that we’re largely at the mercy of the Federal Reserve her
You’ve gone with this a few times this past week. Two things:
1) The fed target rate still less than 0.25%. Which means Bernake really can’t *do* anything – he’s still at a zero bound. (more precisely he can’t do anything directly – he’s got the quantitative easing thing but it’s rarely (never?) been used, and in any case is a lot more indirect – and iirc requires some congressional/executive concurrence)
2) As to your political argument: Obama just renominated Bernake; you don’t think he (Obama) took that into consideration? The lifelong academic outplaying one of premier political players of his generation? Really?
October 30th, 2009 at 2:49 pm
He’s also a conservative Republican appointed to his job by George W. Bush
And reappointed by President Obama.
It seems extremely plausible to me that a scenario in which the US experiencing three years of modest economic growth, high unemployment, rising productivity, flat wages, rising corporate profits, and GOP election victories is one he’d consider just fine.
So President Obama reppointed somebody who thinks “GOP election victories” are “just fine”? Really???
October 30th, 2009 at 2:54 pm
Per EERac (#7), who the hell is answering these polls? How are they collecting the responses? If the pollsters are relying on cold calls to land lines, they’re getting a bunch of old goats who don’t screen calls.
If so, we’re hearing the option of folks who don’t worry about employment, and whose grasp on economics begins and ends with the analogy of household belt-tightening.
October 30th, 2009 at 3:20 pm
The decision is not Bernanke’s alone. All things considered, I would not expect to see a change in the Federal Funds rate or the discount rate in the next six months. I would, however, like to see some of the quantitative easing discontinued. In particular, private banks should not earn interest on “excess” reserves parked at the Fed.
But that isn’t central to my point. MY has two posts now where he has expressed concern about monetary policy. The central issue now is fiscal policy, and the general role of the US Senate and the specific role of the Surf & Turf Coalition in determining it.
October 30th, 2009 at 3:38 pm
As he says, this implies that even if worried about the sustainability of the Q3 growth pattern prove misguided and we can keep growing at 3.5 percent, “American unemployment will remain near 10% through the end of 2010, at least.”
I wonder if structural changes in the US economy, or changes in the composition of the US workforce, imply lower jobless numbers, ceteris paribus, than in the early 1980s. The reason I wonder this is the simpl fact that unemployment isn’t quite as high as it was in at the end of 1982, despite the fact that this recession has been longer and deeper. I’m guessing the greater prevalence of the service sector in 2009 actually makes for less severe labor market disruptions than a generation ago. And I’m hoping this perhaps means unemployment will fall a bit more rapidly than some folks are predicting.
October 30th, 2009 at 3:42 pm
AlanW – Actually, that’s not historically true. The Civil Works Administration created 4.27 million jobs in three months in the winter of 1933, and had convinced the public that things were getting better enough that the Democrats picked up a rare, and significant, midterm win in 1934.
ron – my argument here is that there is limited will at the moment for raising taxes or further increasing the deficit, which would be needed for a jobs program. However, the Fed could just create $600 billion, give it to the government, and let them do a jobs program that didn’t alter the budget picture.
October 30th, 2009 at 4:21 pm
However, the Fed could just create $600 billion, give it to the government, and let them do a jobs program that didn’t alter the budget picture.
I believe the way that would work is that the Fed would buy Treasury bonds from the Treasury (the Fed is required to have collateral for loans). But when the Treasury sells bonds it counts against the deficit.
Plus, the Treasury could sell bonds on the open market – but that would still count against the deficit. And then congress would have to enact the spending – so the end result is back to where I was.
October 30th, 2009 at 5:44 pm
21:So President Obama reppointed somebody who thinks “GOP election victories” are “just fine”? Really???
It is a little too soon to tell, but I do consider it a strong possiblity that Obama would prefer a more Republican, more conservative Congress, and is using policy to achieve that goal in the midterms.
October 30th, 2009 at 6:02 pm
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