In short, the seasonal adjustment factor predicts that new UI claims should rise by 103,000 in the week before Thanksgiving relative to two weeks before Thanksgiving. Because claims only went up by 68,000, the BLS thinks that is very good news for the job market–not as many people are being laid-off from construction and Christmas rush goods-producing jobs as December nears.

Now maybe the BLS is right. Maybe the smaller-than-suggested-by-the-historical-record increase in the number of new unemployment claims really does represent improving labor market conditions. But it seems equally possible that the historical record is an unreliable guide to our current situation with historically high levels of unemployment. Meanwhile, we still seem to be nowhere near the pace of growth at which the volume of jobless people actually declines.

People who purport to be concerned about the budget deficit really ought to be spending more time worrying about what the Fed is doing. It’s very difficult, after all, to see how we’re going to stick to PAYGO rules in the medium-term if we have persistent high unemployment. That situation is going to lead to repeated unemployment insurance extensions and increased federal Medicaid spending while also producing considerable pressure to avoid tax increases. That means bigger deficits. But if eight percent of the country is unemployed, what are you going to do?

And that’s what the Fed is projecting. But instead of looking at ways to make monetary policy more accommodating, FOMC members seem obsessed with searching for an “exit strategy” even though their analysis of the situation implies they should keep interest rates at zero at least through the end of 2012.

I’ve had some correspondents suggest that the Fed really does want to be more accommodating but there’s nothing more they can do. That’s certainly not the way recent statements have sounded to me. On the contrary, it seems to me that Ben Bernanke and co. are just flagrantly ignoring their actual legal mandate to balance considerations of employment, growth, and price stability. If we had five percent unemployment and five percent inflation instead of 10 percent unemployment and no inflation, the Fed would be freaking out. So why not freak out at 10 percent unemployment? It’s hard for me to avoid the conclusion that social stratification is driving a weird level of complacency among the country’s political and economic elite. Labor market conditions are much better for college graduates than for those without bachelor’s degrees, and everyone who matters has a college degree and probably associates overwhelmingly with people with college degrees.

“It was worth doing — it’s made a difference,” said Nigel Gault, chief economist at IHS Global Insight, a financial forecasting and analysis group based in Lexington, Mass.

Mr. Gault added: “I don’t think it’s right to look at it by saying, ‘Well, the economy is still doing extremely badly, therefore the stimulus didn’t work.’ I’m afraid the answer is, yes, we did badly but we would have done even worse without the stimulus.”

In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do. And it is fortuitous, many say, that the money gets doled out over two years — longer for major construction — considering the probable length of the “jobless recovery” under way as wary employers hold off on new hiring.

As Brad DeLong points out these are people who need to sell their forecasts to paying clients. They make a living by trying to be credible to people who are trying to exploit macroeconomic information in order to make money. They’re not people who are trying to make a living by flattering the prejudices of donors to conservative political causes or by serving the short-term political needs of conservative elected officials.

The great tragedy of 2009 is that a bill that’s pretty clearly done enormous good but was based on unduly optimistic assumptions is now widely panned as having failed.

All told, extent of price increases explains over half the variance in the extent of declines. Detroit is a clear exception to this trend, crashing much harder than it ever rose. Something notably about this is that a great many metro areas still haven’t seen declines equal in magnitude to the boom. Will prices continue to decline or stagnate until everything’s back to zero?

For a while now I’ve been saying that the fastest way to end the war in Afghanistan would be to to ask General McChrystal’s staff to produce a plan to make it deficit neutral and find sixty votes in the senate for his financing plan. Today, Spencer Ackerman points out that an excellent LA Times piece by Christi Parsons and Julian E. Barnes that digs into the issue of how much going bigger in Afghanistan would cost seems to indicate that the Pentagon agrees with me. Thus, they’re fudging the numbers to make their preferred policies look cheaper than they really are:

The Pentagon cost includes higher combat wages, extra aircraft hours and other operations and maintenance costs, but omits such items as new weapons purchases — one-time costs that vary by year — and support equipment like spy satellites and anti-roadside-bomb technology.

The Pentagon also does not try to estimate costs of new bases for additional soldiers.

But in a memo early this month, obtained by The Times’ Washington bureau, the Pentagon’s own comptroller produced an estimate that broke with the customary Defense formula and did include construction and equipment.

Estimating weapons and equipment costs is clearly going to be difficult. But it’s equally clear that $0 is the wrong estimate. And as we see, the DOD has some way of doing this for internal consumption.

Meanwhile, I’d like to see Paul Krugman or other advocates of more stimulus weigh-in on whether debt-financed escalation of military effort would have a beneficial impact on the labor market situation. I think it’s deplorable that U.S. political culture tends to regard military-related appropriations as exempt from normal budgetary considerations, but it’s possible that that’s a loophole worth taking advantage of in this case. All those new weapons purchases the Pentagon doesn’t want to estimate are manufacturing jobs for someone, right? Obviously this shouldn’t the primary consideration in dictating military strategy, but I do think a comprehensive look at the macroeconomic impact of defense policy choices—both the costs and benefits of hugely expensively military undertakings—is a necessary element of the strategic consideration.

(cc photo by I See Modern Britain)

For all the talk about how the current economic crisis started in the housing market, taken on its own terms the ups-and-downs of the real estate industry are pretty straightforward. New households are formed at a certain rate. And homes become obsolete at a certain rate. When you have a prolonged period of time when homes are being built faster than they’re needed you get a crash in prices and construction activity. But after a fallow period of construction, the excess supply should eventually get bought and people will want to buy homes again. Thus it shouldn’t come as much of a surprise to see the National Association of Realtors reporting that inventories are shrinking on rising sales. It’ll be a while until there’s a lot of new demand for residential construction, but the arrival of that day is fairly inevitable—the population is growing.

The problem, however, is that we’ve got much bigger economic problems now than the decline in employment in the construction industry. In particular, we’re facing the prospect of an extended period in which widespread joblessness leads to a general lack of demand for goods and services, which itself leads to joblessness and low levels of investment, leading to more joblessness.

Talk of environmental problems in recent years has tended to focus on climate change, but an excellent Charles Duhig piece in The New York Times reminds us that thanks to inadequate capacity at the nation’s sewage treatment plants many cities still find themselves dumping raw sewage into rivers when heavy rain falls.

Part of the problem is the spread of the ever-villainous vast surface parking lot, whose non-permeable surface (in contrast to, say, grass or trees) creates extra water flow. But the largest issue is simply that upgraded the capacity of sewage treatment plants is the kind of infrastructure project we’ve been neglecting for decades. That, in turn, should be a reminder that it shouldn’t reall be all that hard to come up with useful things to do if there’s an interest in additional job creation measures.

Building on yesterday’s idea, borrowed from Brad DeLong, that the Fed could stimulate the economy by raising its long-term inflation target from two percent to three percent it’s worth noting that there are other arguments for thinking that this would be a good idea. First off, it’s worth noting that three percent inflation is still pretty low. There’s nothing magical about the two percent number, and a somewhat higher figure is still very much consistent with the basic idea that low inflation is good.

Second, a higher inflation rate would speed the process by which households climb out from over-indebtedness. Third, a higher inflation rate would ensure that in the future the Fed has more “running room” for conventional monetary policy before hitting the zero bound and getting into this madness. Fourth, a higher inflation rate would speed the process by which real wages and prices adjust to whatever real shocks the economy may or may not be suffering from.

This course of action seems to be anathema to the powers that be, but it seems strongly preferable to a prolonged period of ten percent unemployment and a possible series of trade wars and the like.

A CNN/Opinion Research Corp. survey released Friday morning indicates that 38 percent of the public blames Republicans for the country’s current economic problems. In May, 53 percent blamed the GOP. According to the poll, 27 percent now blame the Democrats for the recession, up 6 points from May, and 27 percent now say both parties are responsible.

I’ll just note that this highlights one important respect in which the filibuster undermines democratic accountability. It’s a good thing for the public to hold Democrats responsible for results even if the problems the Democrats are dealing with began under GOP rule. That instinct creates appropriate incentives for incumbent politicians to focus on solving problems rather than on allocating blame. But giving defeated electoral minorities veto power over large elements of national policy tends to undermine this dynamic. What’s wanted is an opportunity for the Obama administration to take its best shot at fixing the economy, followed by an “accountability moment” in which failure is decisively punished. Instead, especially if the GOP picks up two or three Senate seats in 2010, we’re likely to get a muddle that refocuses politics on blame-shifting efforts.

The good news about this Ben Bernanke speech to the Economic Club of New York is that he shows no sign of wanting to join David Ignatius in tightening monetary policy. The bad news is that he sounds awfully blasé about the prospect of a prolonged period of double digit unemployment:

Jobs are likely to remain scarce for some time, keeping households cautious about spending. As the recovery becomes established, however, payrolls should begin to grow again, at a pace that increases over time. Nevertheless, as net gains of roughly 100,000 jobs per month are needed just to absorb new entrants to the labor force, the unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect.

The outlook for inflation is also subject to a number of crosscurrents. Many factors affect inflation, including slack in resource utilization, inflation expectations, exchange rates, and the prices of oil and other commodities. Although resource slack cannot be measured precisely, it certainly is high, and it is showing through to underlying wage and price trends. Longer-run inflation expectations are stable, having responded relatively little either to downward or upward pressures on inflation; expectations can be early warnings of actual inflation, however, and must be monitored carefully. Commodities prices have risen lately, likely reflecting the pickup in global economic activity, especially in resource-intensive emerging market economies, and the recent depreciation of the dollar. On net, notwithstanding significant crosscurrents, inflation seems likely to remain subdued for some time.

Now if you were just asking my opinion, I’d say something very similar to what Bernanke is saying here. But Bernanke isn’t just offering an opinion, he’s the country’s top monetary policymaker. And he’s telling us that his vision of recovery involves a long period of labor market weakness and low inflation. He says that this situation is “likely to warrant exceptionally low levels of the federal funds rate for an extended period” but the very high level of unemployment seems to clearly militate in favor of further easing. Bernanke acknowledges that he has a “dual mandate to foster both maximum employment and price stability” but he’s also acknowledging in this piece that he hasn’t fostered anything close to full employment, and doesn’t think his policies are likely to achieve anything close to full employment any time soon.

But then why isn’t he doing more?

Something that I think hasn’t gotten enough attention here is whether we haven’t passed the moment when this would have been most helpful. Such a program, enacted 12 months ago, could have avoided a lot of layoffs. But looking forward we’re not so much worried about large additional net job losses. What we’re worried about is that given the large number of unemployed people, we need to see large net job growth but instead we could be seeing job growth so anemic that it doesn’t even keep up with labor force growth. That’s a very serious problem. But it’s not clear to be that it’s a problem work-sharing really addresses.

It’s also worth saying that even looking backwards we were in a very different situation than Germany. Germany’s export-oriented economy was heavily hit by the recession because demand for their products vanished. But in that sense they were very much a secondary casualty of the recession. The presumption was that once growth returned elsewhere, people would go back to buying German stuff and employment would return at more-or-less the same firms that it had been at in the past. In the U.S. context, it’s not clear how much help work-sharing would have provided to people working in the building trades who lost their jobs.

Yesterday David Ignatius accused Chris Dodd of wanting to politicize the Federal Reserve’s control of monetary policy. Kevin Drum points out that Ignatius has this wrong. But it’s worth noting something deeper about Ignatius’ concerns:

The political challenge to the central bank’s authority comes at an especially delicate moment — as the economy begins to rebound and the Fed considers future tightening of monetary policy. It will need public support to combat inflation. But as the New York Times noted in a front-page article last week, the Fed is “under more intense attack than at any time in decades,” from both left and right.

This is nuts. Unemployment is over ten percent. And unemployment is rising! There’s no inflation happening. It would be good for the Fed to have public support in combating inflation if combatting inflation were a good idea. But it’s not a good idea. Not a good idea at all. To repeat, unemployment is at 10 percent and rising. All the evidence suggests that the Fed ought to be attempting additional monetary expansion to return the economy to an acceptable growth path, not tightening monetary policy to combat inflation. In fact, the expectation that if inflation emerges the Fed will stamp it out immediately has become a source of economic problems.

Conventional wisdom is in favor of central bank independence. But insofar as that CW has validity, it’s because it’s been our experience that independence leads to good monetary policy. A prolonged period of double-digit unemployment would mean, almost by definition, that your monetary policy is not good. But none of the world’s major central banks seem to feel that additional monetary expansion would be a good response to massive joblessness and sluggish growth. But if massive joblessness isn’t a good time for monetary expansion then when is? If Ignatius and Ben Bernanke don’t like the populist agitation happening right now, they’re really going to hate the populist agitation that’ll be happening after 12 more months of sustained high unemployment.

Like most progressives, I find it extremely annoying that Beltway conventional wisdom exempts military-related expenditures from the normal rules of budgeting.

At the same time, in these days of recession it does occur to me that to some extent this is a two-way street. I’ve been inclined to complain that most of these more ambitious visions for Afghanistan, for example, don’t seem to meet any kind of reasonable cost-benefit test. After all, they could use better security, a Provincial Reconstruction Team, and a “civilian surge” in Newark, New Jersey. But if you take the hypocrisy of the political system as a given, this looks a bit different. At the end of the day, war expenditures don’t trade off with domestic expenditures, they trade off with increased levels of public debt. Under normal circumstances, that still means that military operations should be (though they generally aren’t) subject to real cost-benefit scrutiny, since higher debt levels has real social costs. But the basic progressive analysis of the current economic situation is that higher short-term debt levels are socially beneficial, right? The story is that World War II—at least from the perspective of the American economy—wasn’t a huge economically wasteful use of resources. Sure it was more wasteful (in economic terms, obviously the “beating Hitler” benefits were quite real) than some other possible projects, but it still on balance was helpful in ending the Depression.

ADDITION! Just after I finished writing this post, but right before I put it up, I saw Christopher Drew’s NYT story “High Costs Weigh on Troop Debate for Afghan War”:

While President Obama’s decision about sending more troops to Afghanistan is primarily a military one, it also has substantial budget implications that are adding pressure to limit the commitment, senior administration officials say. [...] Senior members of the House Appropriations Committee have already expressed reservations about the potential long-term costs of expanding the war in Afghanistan. And Mr. Obama could find it difficult to win approval for the additional spending in Congress, where he would have to depend on Republicans to counter defections from liberal Democrats.

I think that to an extent invalidates my musings above. I assume the reference to “senior members of the House Appropriations Committee” refers primarily to David Obey who’s expressed concerns about this.

The first-best answer — that is, the answer that economic models, like my old Japan’s trap analysis, suggest would be optimal — would be to credibly commit to higher inflation, so as to reduce real interest rates.

But the key thing to recognize about this answer is that it’s all about expectations — the central bank only has traction over expected inflation to the extent that it can convince people that it will deliver that inflation after the liquidity trap is over. So to make this policy work you have to (i) convince current policymakers that it’s the right answer (ii) Make that argument persuasive enough that it will guide the actions of future policymakers (iii) Convince investors, consumers, and firms that you have in fact achieved (i) and (ii).

In reality, we haven’t even gotten anywhere near (i): the conventional wisdom is still that any rise in expected inflation above 2 percent is a bad thing, when it’s actually good.

But Krugman thinks this isn’t going to happen. He doesn’t focus on this solution because “I don’t think I’ll get anywhere, at least not until or unless the slump goes on for a long time.” Hence, the focus first on expansionary fiscal policy and now increasingly on direct support for employment.

But if this political analysis is correct, then aren’t the monetary authorities going to end up undermining anything that can be done on the fiscal side? You can see how fiscal policy could be effective as an adjunct to monetary efforts, but if fiscal and monetary policymakers try to work at cross-purposes, then my understanding is that monetary policy wins.

(photo by me, available under cc license)

The recession ends in Europe though this isn’t much of a recovery:

The E.U.’s statistics agency, Eurostat, reported that G.D.P. growth in the 16-member euro zone improved by 0.4 percent from the second quarter, following five consecutive quarters of contraction. Growth was still 4.1 percent lower than a year earlier.

The rebound appeared to be powered by Germany. There, G.D.P. growth rose by 0.7 percent from the second quarter, when it was up by 0.4 percent. Compared to a year earlier, German G.D.P. was down 4.7 percent.

That these kind of numbers can signal the end of a recession mostly shows the somewhat arbitrary significance of the number zero. Those are terrible growth numbers, and imply that labor market conditions are getting worse. What’s more, a place like Spain is currently experiencing depression-like conditions and the European Central Bank seems to be looking for any kind of vague excuse to halt expansionary policies. This kind of just-barely-above-zero growth might turn into the ECB’s opportunity to step on the breaks, which would be a terrible idea.

Instead, Deborah Soloman and Jonathan Weisman report that the White House is considering letting short-term political optics dictate policy:

The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal responsibility: the $700 billion financial rescue.

The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter. It is also expected to lower the projected long-term cost of the program — the amount it expects to lose — to as little as $200 billion from $341 billion estimated in August.

They say that the idea “is still a matter of debate within the administration.” Let’s hope they reject it. There is one and only one good reason to prioritize short-term deficit reduction, and that’s if you believe that prioritizing short-term deficit reduction will improve economic growth. We know from previous reporting that nobody on the White House economic team believes that this is the case. The pressure to look at deficit reduction is political pressure, “pressure to show it is serious about tackling the budget deficit.” In brass tacks political terms, however, a substantial deficit in 2010 is inevitable either way. The question is whether it’s a substantial deficit that voters will find forgivable thanks to the robust economic recovery and falling unemployment, or if it’s a substantial deficit that voters deem intolerable thanks to an anemic recovery and high, flat unemployment. The politics here are all about getting the policy right.

Nicholas Poussin, The Adoration of the Golden Calf

Realistically the best use of these funds might be semi-corrupt pork barrel projects designed to persuade key legislators to stop threatening the country with a debt default and start voting “yes” on key legislation. We could build a giant golden calf in Indiana in place of the false God of fiscal austerity. And as I’ve had occasion to note in the past, the administration has arguably been too eager to ask what substantive policy concessions Olympia Snowe wants and unduly reluctant to ask what our country can do for the lobster industry. Contractionary fiscal policy would be an extremely costly way of buying congressional breathing room.

Brad DeLong was inspired to make similar observations in mid-October when the media reported that new unemployment claims had fallen when, in fact, they rose and then were seasonally adjusted into negative territory:

One issue here is that in unusual times the seasonal adjustment process based on the recent past is probably not going to give you the best results. That said, I don’t think dumping the process would help, the labor market really does exhibit a lot of seasonality. But I think responsible journalism should report both numbers fairly prominently. Even if an uptick in economic activity turns out to be purely seasonal, it’s still a real occurrence in the world.

In general, unemployment is higher for the young than the old higher for the worse-educated than for the better educated, higher for men than for women, and higher for blacks than whites.

The dismal labor market for workers is evident in nearly every series the BLS has from its household survey, which measures labor market weakness. Nearly a million workers have left the labor force over the past year; two-thirds of those unemployed are out of work because they lost their prior job, dwarfing new and returning labor market entrants; 9.3 million workers are employed part-time even though they would prefer a full-time jobs; and the share of the population with a job has fallen to 58.5 percent, lower than at any point since 1983; adult men’s employment rates fell to 66.7 percent, hitting another all-time low (going back to 1948); and teens are seeing their worst labor market ever—unemployment among 16- to 19-year-olds is a record 27.6 percent.

The high unemployment among teens is going to retard their acquisition of basic labor market skills and they’ll suffer lifelong consequences as a result. You sometimes hear it said that we can’t afford to burden the future with additional debt and “printing money.” The reality is that we can’t afford not to. Surveying the political situation, there’s probably more room for action on the Fed side of things than the Congress/White House side, but either way we need more expansionary policies.

Paul Krugman wonders why we don’t just do direct public works like in the WPA:

You can make a pretty good case that just employing a lot of people directly would be a lot more cost-effective; the WPA and CCC cost surprisingly little given the number of people put to work. Think of it as the stimulus equivalent of getting the middlemen out of the student loan program.

So why aren’t we doing this? Politics, of course: government is the problem, not the solution, even when it is, you know, the solution, and cheaper than running things through the private sector.

Possibly the best way to think about this would be as an alternative to the repeated extensions of unemployment insurance payments. Instead of saying to people whose UI benefits are about to expire “just kidding, here’s an extension” we could say “you’ll keep getting checks but you need to show up at such-and-such a place and pick up trash in parks.” This would be somewhat more expensive than a UI extension—you’d need to pay for garbage bags and supervisors—but it would have less of a disemployment effect than UI extensions and we’d also get cleaner parks in the bargain. It’s a little bit perverse to be paying people to do nothing when there’s work that could use doing.

But a problem modern advanced economies have in advancing this sort of scheme is that the people already working in the public sector don’t want to be squeezed out by facing competition from quasi-unemployed engaged in public works schemes. In other words, the key stakeholders on various different sides of the equation prefer the inefficient choice of just cutting checks—it involves less debt for the “centrists,” less competition for public sector unions, and less arduous demands on the unemployed.