The Jobs Picture

Most people know that private sector jobs have been increasing, although recently at a slower rate than expected.

The question is where new jobs are going to come from. In order to get a clear picture, we need to figure out how jobs have been lost.  The Business Employment Dynamics (BED) survey from the Bureau of Labor Statistics (BLS) has some good data, though it is only quarterly and updated through September 2009. The y axis for the below charts are in thousands of people.

The drop in job creation has occurred due to fewer expanding companies.

The main source of job losses has come from company downsizing as opposed to a spike in bankruptcies.

The BLS’s Job Openings and Labor Turnover Survey gives more recent data (Up to April), and sheds a little more light on where the job losses are coming from. Job gains have occurred because separations have trended downwards, while hiring has only picked up marginally.

Job opening data is a little bit more optimistic.

However, the data for separations is a little less optimistic, the overall job picture is only looking good because people aren’t quitting their jobs at a normal rate. If quits were at normal levels then the private sector would be losing jobs.

All of these charts would look a little bit different if looked at in the rate space, since the population has been increasing the numbers would all look a little less significant.  On a ten or twenty year basis, looking at levels isn’t going to skew the results by more than 10%, but when looking at time frames over a fifty year period, using levels rather than percentages significantly exaggerates the situation.

IQ, patience & risk aversion

The more intelligent a person is, the less risk averse and more patient they are. The study, "Are Risk Aversion and Impatience
Related to Cognitive Ability?" done by Thomas Dohmen, Armin Falk, David Huff man and Uwe Sunde found a significant relationship between these variables when they surveyed a thousand German participants drawn from the general population. 

If this relationship holds across countries and on an aggregate level, it would suggest that countries with low average IQ's have additional barriers to overcome.  It might even suggest that countries with lower average IQ's implement policies of forced savings to increase the focus on the long run, though given how corrupt the governments of these countries are any policy that actually gets implemented is likely to be inefficient at the margin.

(No HT for the study, because I forgot where I found this study.)

The US should do something like this again

Tyler Cowen links to a planned mass medical study in Germany.

German scientists are planning the country’s biggest biomedical study. The National Cohort will be an intensive investigation of the health, lifestyle and genetics of 200,000 people, at an estimated cost of €210m over 10 years.

He notes that they don't mention plans to study the efficacy of health care access, but it could still be studied.  In fact, it could be better if they don't directly study the effect of health care access and instead merely control for it while looking at other things such as the impact of exercise on health.  This way, they will be more likely to throw some variables representing treatment frequency into the regression (At the very least, there is a subgroup of 40,000 receiving more detailed attention) and we can see whether or not the variable is significant or even the right sign.  It is better that they don't study it directly because if they studied the impact of health care access directly, they might be more prone to try and jigger the regression until the variable had a sign and significance that fit with their preconception.

Less Temporary Workers = More Recalculation

The Cleveland Fed's Murat Tasci published a commentary called "Are Jobless Recoveries the New Norm?" in March 2010. This paper adds some weight to those on the side of structural change in the recalculation debate, the idea that a large part of the reason that the economy is slowing down is because resources are improperly allocated.  If this is true, it means that Keynesian stimulus will be less effective.

Another statistic suggests that some of these unemployed workers will not be able to immediately find work: the fraction of unemployed workers who have been laid off temporarily. Traditionally, some employers lay off workers with an implicit (or explicit) understanding that they will be recalled when the economy improves. Temporary layoffs save both parties from having to spend time and effort searching for a job or a worker when the need for labor increases. Usually, the fraction of the unemployed who are on temporary layoffs jumps at the beginning of recessions. Currently, this measure stands at around 10 percent, but it did not increase much during the recession; if anything, it fell slightly. This implies that fi rms do not perceive the employment adjustment they are going through as temporary or that conditions are such that they are willing to incur costly hiring efforts after the recession.
 
....
 
The low levels of temporary layoffs suggest that the skills of some of these unemployed workers are specific to industries that may end up significantly smaller after the recession.

The more people ignore that there is structural economic change, the worse the policy is going to be.  The simple idea of re-inflating aggregate demand doesn't work to the extent that the recovered economy is going to be different than the pre-crash economy, and the efforts of private companies to capture new fiscal spending or figuring out what the new regulatory structure is going to look like is effort not spent towards actually becoming more productive.

Over extrapolating bad news?

There has been quite a few disappointing US economic data point recently - consumer confidence is down and the total amount of job creation in the private sector is disappointing relative to economist's models.  This type of data leads a lot of people to talk about a double dip recession. While this is possible, it may be that this is merely the impact you get when part of the country is hit by an environmental disaster - the job growth is a little more anemic and consumer confidence goes down.  On June 9th, the Atlanta Fed had this to say:

On balance, Sixth District business conditions appear to have improved modestly in April and May.

....

However, the recent Gulf oil spill and the floods in Tennessee have tempered the outlook in those areas. Contacts indicated that the potential impact on the tourism industry along the coastline of Louisiana, Mississippi, Alabama and western Florida could be substantial. In some cases, vacation lodging cancellations have been replaced by bookings from clean-up crews, laborers, and the National Guard. The Nashville area is expected to see a decline in tourism-related receipts because of damage to several tourist venues there. The near-term outlook among hospitality contacts varied greatly, reflecting the high level of uncertainty.

Since regional labor data lags by a few months, the next Beige book, released on July 28th, might help clear things up a little more.  There is no question that the public at large is over estimating the spill's economic impact and it is also true that the US has some long term structural economic problems that have yet to be resolved, but it would be interesting if the financial markets are over extrapolating by looking at the temporary deviations caused by this disaster and assuming that they are a sign of a systematic problem.

Convenient Keynesianism?

The real time economics blog had a post last week previewing the G20. It had an interesting quote about Obama's views.

Mr. Obama talked of the need to “restore sustainable public finances,” but he pushed that off to the “medium term” — which means three to five years from now. There was no mention of starting by 2011, as the Europeans want.

Waiting for three years means not cutting back on stimulus until 2013 at the earliest. This is good for him because even a short term economic slowdown, no matter how necessary, can ruin a reelection campaign. This isn't to say that Obama doesn't truly believe that this path is best for the economy, but with the health care mandate not occurring until 2014 I am beginning to sense a pattern.

CBO's Long Term Budget Outlook: Revenue will be less than spending

The CBO released their Long-Term Budget Outlook for 2010! This may be a weird thing to get excited about, but I was looking through their 2009 outlook and wishing that I could work with an updated version.

Key quote:

Keeping deficits and debt from growing to unsustainable levels would require raising revenues as a percentage of GDP significantly above past levels, reducing outlays sharply relative to CBO’s projections, or some combination of those approaches. Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery. However, the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them.”

Key chart:

In order to make sense of the above chart, the difference between the extended-baseline scenario and the alternative fiscal scenario needs to be understood.  The extended base-line scenario assumes that taxes and revenue change as is expected in the current law.  The alternative fiscal scenario assumes things that are likely but are not scheduled under the current law, such as no Medicare physician payment cuts and the AMT tax relief (See Table 1-1 in the report for more details).

My main complaint about this approach is that the least likely aspect of alternative fiscal scenario is also one of the most important: that it assumes that the tax cuts from 2001 and 2003 are not going to be allowed to sunset. This can be partially corrected for by using the revenue from the extended baseline-scenario and spending from the alternative fiscal scenario.  We find that the primary deficit (Deficit before including interest payments) will be -1.4% in 2020 and -3.1% of GDP in 2035.  Incorporating in the interest payments from the alternative baseline scenario (The actual interest payments will be higher due to a larger debt build up), that means that the total deficit will be -4.5% in 2020 and -7% in 2035.

I’ll end with a CBO table that informs us that the sooner the deficit is brought under control, the better:

Waiting for the banks to right themselves

Michael Pettis has a good post on what history tells us about the Greek crisis.  One of his conclusion is that in these types of sovereign crisis, things take longer to pan out because the banks are reluctant to mark their books to market when that could make them insolvent.

Why did it take so long? Were the banks stupid?  No, banks knew full well that they weren’t going to get their money back as early as the mid-1980s, but to have acknowledge this would have required them to set aside more capital to absorb the losses than most of them possessed.  The recognition of the obvious had to wait nearly a full decade so that banks could build a sufficient capital cushion to absorb the losses.
 
So too with the European crisis.  Much of the Greek debt is held by European banks, and they simply do not have enough capital to absorb losses on Greek debt, let alone if Greece were to be joined by Portugal, Spain and others.  The banks will need first to rebuild their capital bases before they can admit the obvious, and this could take several years.

This pattern of not marking down assets seems to be a pattern for banks, and judging from some recent government actions, they have the full support of the authorities.  While it might seem obvious that politicians are acting to protect many of the current elites, their actions are also occurring because Europe is acting on the play book developed during the last financial crisis, and that play book involved buying the surviving banks enough time to earn their way out of insolvency.  Until there is some type of resolution, the weaker European economies will have to cope with both austerity and uncertainty.

Some Links

1. Tyler Cowen links to his article. He sees an inevitable shift towards fiscal austerity, though through no fault of the conservative movement. It contains a sentence that sums up "politics fails" without being disproportionally pessimistic: "Finally, effective political ideas are those that can still do good in half-baked form."

2. Arnold Kling wonders if soccer fans like the high luck factor because they are vaguely socialist.  I agree that the format is off - there probably is about as much luck in a soccer game as in the outcome of a baseball game. The difference is that baseball games are decided by series, which reduces the amount of luck. I think it is more likely that those who complained to Arnold had a position about soccer first, "I like the status quo," and came up with socialist sounding reasons for it afterward in an attempt to justify their positions.

3. Kartik Athreya, a research economist at the Federal Reserve Bank of Richmond recently wrote a paper (Link is currently broken) about how those who didn't spend quite a few years of their lives in an economic Ph.D program should not publicly express their views on macroeconomic policy. The reception to his piece in the blogosphere was not very positive. This negative reaction may be why the paper is no longer available.

4. Jeff Matthews explains that government failure isn't always a bad thing when the alternative is policy victory.