France never recovered from the 1974/1981 recessions. Will we recover from this one?

Probably.  Nevertheless it’s worth thinking about the implications of this Robert Barro piece:

To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment-insurance coverage to 99 weeks had not occurred and—I assume—the share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983. Then, if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.

In contrast, his son Josh Barro points out that most studies suggest extended UI boosted the unemployment rate by only about 0.4% or 0.7%, and then goes on to argue that even those figures may be too high.

…The incentive effects of UI extension must also be weighed against the stimulative effects of paying UI benefits. For some reason it’s become almost taboo to note this on the Right, but UI recipients tend to be highly inclined to spend funds they receive immediately, meaning that more UI payments are likely to increase aggregate demand. UI extension also helps to avoid events like foreclosure, eviction and bankruptcy, which in addition to being personal disasters are also destructive of economic value.

I’d like to sit in on one of those family dinners!

Count me as being somewhere between the two Barros, but closer to Josh.  I think the main difference between 1983 and today is that NGDP growth was nearly three times faster in the initial recovery of 1983-84.  If that’s all I knew about this recession–nothing about the banking/housing fundamentals that triggered it, and nothing about 99 week UI extensions, I’d still predict a very slow recovery, albeit perhaps a tad faster than we are getting.  Robert Barro contrasts the slow recovery to 1983, but better comparisons might be 1992 and 2002, when unemployment actually rose for more than a year after the end of the contraction.

However, I wouldn’t go as far as Josh Barro, who concedes a small adverse effect on the economy’s supply side, but then argues that the program boosts AD.  If extended UI benefits make the labor market more rigid (which seems likely), then it may reduce the equilibrium real rate of interest.  In that case monetary policy will become effectively tighter, even if the Fed continues to target nominal rates at 0.25%.  Many economists overlook the way supply and demand shocks become entangled.  There is a reason why negative demand shocks often follow closely on the heels of negative supply shocks (1974, 2008, etc.)

And although I think it unlikely we end up never recovering, the French experience should teach us some humility.  Recall that in the 1960s most European economies had much lower unemployment than the US, typically around 2% or 3%.  By the 1980s many were stuck with rates close to 10%.  France never really recovered from the 1981 recession, with unemployment fluctuating between 7% and 11% over the past 30 years.  And in 1972 no one in Europe saw this coming.

Why did it happen?  Who knows.  Initially people came up with all sorts of explanations.  Here’s an example from a 1993 paper:

A flow model is used to identify the causes for rising unemployment in France between 1978 and 1990. Two flow equations are estimated as functions of exogenous factors such as aggregate demand, factor costs, structural shifts and long-term factors and then used in simulations for the level of unemployment. It is shown that the main reason for high unemployment in France is a slow down in the demand for labour due to high labour and energy costs in the early 1980s and to tight aggregate demand over the whole period.  Change in the labour supply have had an increasing impact in recent years.

Today it seems silly to cite AD and energy prices, but it’s hard not to sympathize with the author (Dominique Gross).  If the cause was structural (as most now believe) it begs the question of why the natural rate of unemployment suddenly rose from 2% to 9%.  And which structural problem?  For ever suspect, you can find some small European country that has that policy, and yet maintains only 5% unemployment.  Perhaps it is labor market policies interacting with differences in culture and comparative advantage. 

An optimist like me would argue that we aren’t about to copy the French statist model; dramatically higher minimum wages, generous UI benefits, national health care, higher taxes, etc.  Oh wait . . .  Seriously, as bad as it looks to conservatives, there is a lot of ruin in a nation.  So I still think there is only a 10% or 20% chance we will experience French-style “ hysteresis” (which refers to a sticky unemployment rate that refuses to fall during “recoveries.”)

One thing that has always annoyed me is economists who do a lot of moral grandstanding, accusing people they disagree with of being evil.  For instance, this is how Robert Reich recently entitled his attack piece on Robert Barro:

A record number of Americans is unemployed for a record length of time. This is a national tragedy. It is to the nation’s credit that many are receiving unemployment benefits. This is good not only for them and their families but also for the economy as a whole, because it allows them to spend and thereby keep others in jobs. That a noted professor would argue against this is obscene.

Regarding obscenity, a Supreme Court justice once said “I know it when I see it.”  With all due respect to Reich, I don’t see it.  Here’s the Barro article he responds to:

The unemployment-insurance program involves a balance between compassion—providing for persons temporarily without work—and efficiency. The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.

In a recession, it is more likely that individual unemployment reflects weak economic conditions, rather than individual decisions to choose leisure over work. Therefore, it is reasonable during a recession to adopt a more generous unemployment-insurance program. In the past, this change entailed extensions to perhaps 39 weeks of eligibility from 26 weeks, though sometimes a bit more and typically conditioned on the employment situation in a person’s state of residence. However, we have never experienced anything close to the blanket extension of eligibility to nearly two years. We have shifted toward a welfare program that resembles those in many Western European countries.

Didn’t Reich just say Barro opposed unemployment insurance?  Not only does he favor it, but he favors extended benefits during recessions. 

Perhaps he thinks it’s obscene to accuse the unemployed of being lazy.  But then I found this in Reich’s article:

In theory, Barro is correct. If people who lose their jobs receive generous unemployment benefits they might stay unemployed longer than if they got nothing.

So I guess somewhere between the 99 weeks recommended by the virtuous Robert Reich, and the 39 weeks recommended by the evil Robert Barro (and implemented by Bill Clinton), UI extension proposals become obscene.  It all reminds me of the old Winston Churchill joke:

Churchill: “Madam, would you sleep with me for five million pounds?”

Socialite: “My goodness, Mr. Churchill… Well, I suppose… we would have to discuss terms, of course…”

Churchill: “Would you sleep with me for five pounds?”

Socialite: “Mr. Churchill, what kind of woman do you think I am?!”

Churchill: “Madam, we’ve already established that. Now we are haggling about the price.”

PS.  Robert Barro is one of my favorite supply-side economists.  No one is more deserving of a Nobel Prize in Economics.  But I think he has a bit of a blind spot about AD shocks, as do many on the right.

HT: Alex Tabarrok, Mark Thoma


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45 Responses to “France never recovered from the 1974/1981 recessions. Will we recover from this one?”

  1. Gravatar of Rebecca Burlingame Rebecca Burlingame
    31. August 2010 at 18:41

    Perhaps it’s the fact that GDP has changed so little (so far) that makes it hard for some on the right to see the change in AD. It’s truly odd because people have a hard time now selling just about any of their assets, yet at the same time a lot of people are reluctant to part with anything they own, of real value.

  2. Gravatar of frankl frankl
    31. August 2010 at 19:31

    that anecdote wrt churchill is an error, i believe – i think it was George Bernard Shaw

  3. Gravatar of Benjamin Cole Benjamin Cole
    31. August 2010 at 19:42

    For a long, long time I have thought the obvious–the role of culture–plays an underestimated role in GDP growth.

    Some cultures seem to be made for the organizational requirements of modern states, such as Germany, Japan, S. Korea. Hard workers is one aspect, but honest government is required too (Mexicans work incredible hours and have little to show for it). These same successful business cultures also seem ready made for nationalistic excesses, but hold that thought.

    Consider Russia: So much technical genius there–but also alcoholism, absenteeism, corruption. A free market or a state system will have those problems of Russian culture. Vodka says F.U. to capitalism.

    France seems to fall towards the bottom of the upper third. Actually, the average guy in France might well live better than the average guy in the USA. Six weeks off a year, good education, health care, and per capita incomes there do go up over time. The food is better too.

    Would you rather live in Paris or Houston?

  4. Gravatar of John Salvatier John Salvatier
    31. August 2010 at 19:56

    What does it mean to “never recover” from a recession? If you never recover that sounds like extremely strong evidence against a monetary cause, or any sort of disequilibrium cause. It sounds like a change in equilibrium, not something I would call a recession.

  5. Gravatar of Morgan Warstler Morgan Warstler
    31. August 2010 at 20:43

    Benji, you want to start measuring skull sizes?

    Rebecca, nice article on the mistake in thinking about GDP / AD – you gotta add in change on debt.

    http://www.businessspectator.com.au/bs.nsf/Article/Bernankes-blind-spot-pd20100830-8T8HE?OpenDocument&src=sph

    And as to parting with assets, people had nothing to do with it, and you’re about to see a lot more of it, banks are FINALLY foreclosing, here comes the sales.

    Remember, people don’t own underwater homes, they just live in them and pay inflated rents.

  6. Gravatar of Joe Joe
    1. September 2010 at 02:52

    I would like to note that my favorite country… Switzerland, had an unemployment rate below 1% between 1940 and 1991.

    http://www.daube.ch/opinions/graphics/bfs-statistik.png

    And since then, they’ve continued doing better than us… less than 4% unemployment

    http://www.daube.ch/opinions/graphics/ch-unemployment.png

    neoliberal paradise I tell you!

  7. Gravatar of James in London James in London
    1. September 2010 at 02:54

    Morgan, well done for cutting down the length of your responses. Longer ones mean key points get ignored/forgotten.

    Reading an old debate from several days ago you said: “Scott, you need to stop calling it ‘targetting NGDP’ – you need to start calling it a ’4% tax annual tax on savings’. $100 in 5 years =$81″.

    I can’t find a reply from Scott to this point. It is the crucial one against Scott and his friends. Why should savers suffer from this stealth tax?

    Savers do not suffer from ‘Money Illusion’ they worry about the real value of their savings and act accordingly if they see threats to the value of their savings. But forced investment into consumption or real asset purchases isn’t value creative as they would otherwise not do this, and may not be very good at it.

    Forcing savers to take risks to earn interest and to seek (possible) nominal capital growth by threatening them with inflation is a leads to a serious misallocation of resources. Better to leave savers with low or zero interest rates, living off their capital and let the risk takers borrow or invest their own to create wealth for themselves and therefore for the rest of us.

    Do Scott and his friends have no cash savings themselves? Is that why the don’t mind advocating the devaluation of the savings of others?

  8. Gravatar of Joe Joe
    1. September 2010 at 02:55

    Also, its not fair to compare Paris to Houston. Compare Paris to New York, now that would be a tough call for most people.

  9. Gravatar of Tim Worstall Tim Worstall
    1. September 2010 at 03:09

    Well, with Winston it is a joke, with Shaw it was an actual conversation so is better called an anecdote.

  10. Gravatar of Indy Indy
    1. September 2010 at 04:15

    My mother was raised in France and I have a handful of working professional relatives who live in Paris. I asked forwarded this question to my uncle (cardiologist). His answer, in part, was the “bouleversement” which I think translates as “upheaval” – the radical changes in French politics and society occurring with the coming of age of the baby-boomer generation (of which he was a part). Apparently, the late 60′s / early 70′s was an even bigger deal in France than in the US.

    Part of the problem, he said, was that the whole baby-boomer wave gradually phased in millions of youngsters looking for middle-class intellectual work for the state – but there not being enough of these well-sought-after positions, they were left with only “low-class, low-pay” occupations, to which they had become allergic at university or, for men, during their mandatory military service. My uncle lucked out and was stationed in Martinique to serve as a community general practitioner for two years after medical school, but when he would get leave and go back a few times, he said he got the impression of “quick deterioration”.

    As the last of the wave began to enter the workforce, the out-of-work babyboomers began to “pile up” on each other, and by the early 70′s, when the wave was complete, there were huge swarms of unemployed new graduates. New laws were introduced to make firing workers harder, but these were counterproductive, since it effectively outlawed “probationary” work, and no employers were willing to take a chance on permanently hiring a bad worker, or having good workers turn lazy when they realized they could not be let go.

    So, I guess he’d chalk that one up to “Special France Social and Political Problems” which weren’t present in neighboring European nations to the same degree. A bit like you might diagnose Spanish or Greek problems today.

  11. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. September 2010 at 04:32

    On France, a short summary would be: responses to cyclical downturn changed the equilibrium by changing the structure.

  12. Gravatar of Finch Finch
    1. September 2010 at 05:38

    I have three young kids. I’d rather live in Houston than in Paris. (Full disclosure: I’ve been to Paris a couple of times, but never Houston)

    Can you imagine trying to buy groceries with three young kids in Paris?

    Not everyone is a 25 year old single male.

  13. Gravatar of Rebecca Burlingame Rebecca Burlingame
    1. September 2010 at 06:17

    Morgan, thanks so much for the link. While I had not specified productive assets in terms of the businesses and the like (besides homes) which people accumulate, the debt problem was a reminder that people really think of those almost in the same way they think of housing. I liked that Steve Keen thought of commodity and asset markets the same way. For me there is a point of origin issue in loans in general. While banks till recently were willing to loan for assets of all kinds, they expect people to be able to pay for the services that those productive assets provide. Now people own the equipment, they just can’t find enough customers who can afford to pay for the services. And the only service I can see that government and banks are willing to originate loans on, are educational services…presumably, even though this is a service, human capital is still being created which supposedly can create more wealth.

  14. Gravatar of Morgan Warstler Morgan Warstler
    1. September 2010 at 07:47

    Houston of course has very few French.

    It annoys me that we speak about unemployment / skills gap as if there isn’t a ready answer:

    1. After 26 weeks, require the unemployed to be anonymously registered on a “seeking training” web site, and report for training if it is offered to them. If they do not report, they are out of the unemployment.

    2. Allow companies to establish unpaid training programs simply by describing it at the same site: length, hours, etc. Training could be limited to 20 hour per week, etc.

    3. Require that companies hire not less than say 25%-33% of people who make it through training – in order to be allowed to stay in the program.

    4. Don’t pay people for training, continue their unemployment. If they are reported as not performing during training – on multiple gigs – cut them off.

    5. Let companies write off 100% of the cost of training. Don’t be anal about rules. Don’t listen to unions.

    —–

    It isn’t rocket science. What’s more you can build from it.

    The data incoming, really lets you get granular on which industries view training as crucial. It reduces new worker turnover, but also gives those who get trained and don’t get hired a better grasp on something new – it enlightens them. You can quickly start to show people of certain skill sets where in the country they have a better chance of finding work.

  15. Gravatar of MikeDC MikeDC
    1. September 2010 at 08:03

    My blind spot to AD shocks comes from the fact that we’ve already got so many AD stabilization programs built into the economy.

    It baffles me that everyone talk about fiscal stimulus as necessary to stave off another Great Depression. When comparing now vs. the Great Depression, the obvious difference has always been that today’s economy already has a lot of “stimulus” built in to the government budget in the form of social security, disability payments, medicare, and at the state level, medicaid. These transfer payments are a much bigger chunk of GDP than the stimulus, they didn’t exist in the depression, and they accomplish basically the same task many of the make work programs of the Depression. They basically provide a lot of support for aggregate demand, and hence, employment.

    In that sense, “fiscal stimulus” has been a big success. The problem is those programs are all on auto-pilot and didn’t provide politicians with the ability to show they were “doing something”. No politician (and actually, I’ve not even heard any commentators make this obvious point) was going to stand up and say another trillion dollars of stimulus (pork for their party) was really unnecessary to prevent “Great Depression II” because actually meaningful fiscal stimulus was accomplished already and AD, while not growing, is not sinking like a stone.

    It’s not that we’re blind to it, it’s that the floors we’ve already put in place seem to be about as good as we’re going to get.

  16. Gravatar of Passing By Passing By
    1. September 2010 at 08:16

    When World War II ended, the major countries were at different levels of development and devastation. Over the next 25 years, the laggards grew faster … including France.

    Since 1970, growth in real GDP per capita has been essentially the same in all major developed countries … including France.

  17. Gravatar of Benjamin Cole Benjamin Cole
    1. September 2010 at 08:44

    Morgan-
    I am sorry if you are sensitive about your skull size. Fluff your hair out a little more.

  18. Gravatar of Rebecca Burlingame Rebecca Burlingame
    1. September 2010 at 08:45

    Scott, Nick Rowe thinks you believe that the Fed just doesn’t want to loosen monetary policy. Per my last comment, might it have anything to do with the fact that banks think there is already enough productive capital assets out there in all the neighborhoods, just sitting and waiting to be used? If so, anyone else who wants to get into self-employment…lots of cheap equipment auctions but watch out.

  19. Gravatar of david david
    1. September 2010 at 09:18

    I don’t have a problem with unemployment benefits at some level but it seems to me that characterizing it as “a balance between compassion and efficiency” as Barro does in the quote above is at best incomplete, even setting aside the fact that exercising compassion by giving to some comes at the expense of taking from others, many of whom may be able to ill afford it. I would suggest the better way to look at it is as involving a balance between reducing misery (for some) in the short run vs reducing misery (for all) in the long run. There is no compassion in ignoring what Barro terms “efficiency”.

    If the purpose is to address the misery of those hardest hit perhaps, after some period of unemployment insurance, assistance could be given which works with market forces rather than against them by, for example, subsidizing the moving expenses of those who lose their jobs and relocate to find employment or providing a tax holiday of some kind.

  20. Gravatar of Benjamin Cole Benjamin Cole
    1. September 2010 at 10:51

    Finch:

    I wish I was a 25-year-old single male. Just three decades off. And my marital status would have to be altered. I have three kids to, although across the age ranges.

    My undertanding is that the French carry bags with them, and shop at bakers, grocers etc on daily basis.

    I will concede, life is a lot easier if one spouse is a homemaker–probably in Paris or Houston.

    Hate to say it, but if I had to live in Paris or Houston…I would choose Rome or Italy or Pakchong, Thailand.

    BTW, I split time between L.A. and Thailand. I know people in L.A. who commute four hours a day. You could do a lot of shopping and child care with those hours.

  21. Gravatar of Morgan Warstler Morgan Warstler
    1. September 2010 at 11:12

    @david,

    that’s what I mean, it is possible to build a system that doesn’t cut off anyone who is readily submitting to private industry training and is willing to move.

    we don’t have to feel around in the dark to between compassion and efficiency. in fact, the mechanisms to ensure the most frictionless efficiency (web based private training job board like I describe) are by definition the most compassionate.

    viewed in that light: too much government oversight of a such a system is less compassionate. too much willingness to allow for laziness, harms the less lazy. cries like “how can we force people to use the Internet in order to get an unemployment check” come from those without compassion.

    no one able bodied has to go wanting, but to truly have compassion/efficiency, we have to get over the idea that this Internet thing can’t be the EXCLUSIVE method for delivery of government services.

    Want your check? Register online. How hard is that? Want to write off your job training program and not have to pay trainees? Register online. How hard is that?

    If nuts and bolts solutions are apparent, moaning about economic theory is not compassionate. It is not a complex problem. Any efforts to add complexity simply must be shouted down.

  22. Gravatar of Jeff Jeff
    1. September 2010 at 11:27

    Scott,

    I think you’ll want to look at this, it’s the KC Fed’s links to papers and talks from Jackson Hole:

    http://www.kansascityfed.org/publications/research/escp/escp-2010.cfm

    I’m currently looking at the Monetary Policy and Stock Market Booms paper, and it makes an interesting point: A boom may be the result of an expected cost-saving technology. The expectation that future costs will fall dampens current inflation, and it also leads to output expansion. Notable is that an inflation-targeting policy does exactly the wrong thing here by attempting move interest rates opposite to what’s happening with the “natural” rate.

    The part of the paper I’ve read thus far does not notice that an NGDP target would do the right thing.

  23. Gravatar of scott sumner scott sumner
    1. September 2010 at 11:35

    Rebecca, AD is hard for most people to grasp.

    frankl, I thought it was Shaw too, but when I checked in the internet it said Churchill. Probably Churchill repeated a Shaw joke.

    Benjamin, Hard-working Germany had the same problem with high unemployment.

    In economic terms Houston.
    In cultural terms Paris.
    In terms of vacations Paris.

    John, That’s what makes it so interesting. It seemed like a recession, but turned out to be structural change. Will ours end up being the same?

    Joe, Switzerland has my favorite political system.

    James, you asked;

    “I can’t find a reply from Scott to this point. It is the crucial one against Scott and his friends. Why should savers suffer from this stealth tax?”

    I’ve talked about this many times. There are two separate issues, the level of inflation or NGDP growth, and the volatility. According to the Fisher effect, if inflation and NGDP growth are higher, then nominal returns will be higher. Because investment income is not indexed to inflation, investors are hurt somewhat by inflation. Of course the government should not tax investment income at all.

    I am focusing on this recession. If our society wants to shift to a lower trend rate of inflation, that’s fine with me. BUT THIS IS A HORRIBLE TIME TO DO SO.

    I am not in favor of low interest rates, so you are attacking a straw man. It is the tight money advocates that have produced these low interest rates. Milton Friedman knew this, but everyone else seems to have forgotten.

    Indy, Your uncle said;

    “As the last of the wave began to enter the workforce, the out-of-work babyboomers began to “pile up” on each other, and by the early 70’s, when the wave was complete, there were huge swarms of unemployed new graduates.”

    Everyone should read your uncle’s comment as an example of how not to think about economic issues. Your uncle is going with his gut reaction, and is as wrong as a person could be. Unemployment was actually very low in 1972, not high. France’s neighbors (Germany, Belgium, Spain, Italy etc) had virtually the same problem. (Switzerland was an exception.) There is nothing special about France, nor was the problem the 60s generation. It was government policies that distorted the labor market.

    The other comments about laws making it difficult to fire people, etc, are exactly right.

    Lorenzo, Maybe, did other European countries change laws at the same time?

    Finch, Yes, I agree on the economic differences.

    Morgan, Workers don’t need training, they need jobs. They’ll get the training they need on the jobs.

    MikeDC, You said;

    “My blind spot to AD shocks comes from the fact that we’ve already got so many AD stabilization programs built into the economy.”

    But we aren’t using the only tool that is effective, monetary policy. If we did, we could create private sector jobs.

    Passing by, Yes, I did a post on that about three month back.

    Rebecca, Yes, I have been commenting over at Nick’s blog.

    David, Good point, but I warn you that Reich would consider you 10 times more “obscene” than Barro.

    Benjamin, I could never understand the long commute. I’ve heard they do it to afford a house, but I’d rather live in a tiny rabbit hutch apartment, than commute that far.

  24. Gravatar of Morgan Warstler Morgan Warstler
    1. September 2010 at 12:17

    “Morgan, Workers don’t need training, they need jobs. They’ll get the training they need on the jobs.”

    ROFL. Scott, when pushed you are exposed as having a HORRIBLE understanding of whats real on the ground. Seriously, do you EVER talk to guys running businesses?

    Let me put it to you this way… using your logic.. right now we have full employment. That’s right full employment.

    You said yesterday you don’t know what the natural unemployment number is – you said it could be 6%. Well guess what buddy? It is actually 10%.

    Because there is no margin on hiring those currently unemployed. None of them can do the jobs we can provide for the $ we can pay.

    Example: To make X product here in the states and sell it for Y, the businessman needs specialized employees who can do specific things and he needs to pay them $12 per hour. The sticky part here is that he can pay NO MORE than $12 per hour, or China wins. There are plenty of people we can find who will work for $12, but none can step into his operation.

    And to train a newbie, it is going to take 2+ months, where the student has to come in at night when the machines aren’t being used, most of the guys he tries to teach this stuff, they aren’t going to be able to do it right, so he has to sift.

    And all of this costs money… we want to be able to compete with China, as long as our unemployed can be trained… so as soon as you accept that our current unemployed do not provide a return on their labor, you can start to see things clearly.

    We have to make high quality things CHEAPER. Period. That means specialized low paid workers.

    Let me ask you this – IF we assume that there will not be any more QE, any more devaluation of our currency, THEN will you admit that we need specialized low paid workers?

  25. Gravatar of Finch Finch
    1. September 2010 at 12:32

    @ Benjamin Cole

    I hope I didn’t sound offended there; I wasn’t. I appreciate your pleasant response.

    > My undertanding is that the French carry bags with them,
    > and shop at bakers, grocers etc on daily basis.

    This is my understanding as well. For various structural reasons, you can’t very well take the minivan to CostCo in Paris. But it’s hardly the only example of how Paris is not family-friendly. And it’s related to why it’s not employment-friendly.

    > I will concede, life is a lot easier if one spouse is a
    > homemaker–probably in Paris or Houston.

    Re-entering the work force after having children is not so easy in Paris, either.

    > I know people in L.A. who commute four hours a day. You
    > could do a lot of shopping and child care with those hours.

    This is, however, unusual. And people in Paris commute, too. And many of them have to do it via public transit. At least in LA you can have your own car.

    Look, I love Paris. It’s a beautiful city filled with culture. It’s Disneyland for wealthy adults. But it’s sort of a big museum, and that manifests itself in high unemployment.

  26. Gravatar of Liberal Roman Liberal Roman
    1. September 2010 at 13:26

    More depressing Fed speak today:

    http://www.reuters.com/article/idUSTRE6805FB20100901

  27. Gravatar of Liberal Roman Liberal Roman
    1. September 2010 at 13:36

    Let me try a more layman’s response to Morgan’s attack that we are hurting savers.

    The historic REAL rate of Treasuries is about 2.5% annually. Even you would agree that it matters little that the rate is 7.5% if inflation is 5%. But you can’t seem to grasp the fact that rates should be and make perfect sense to be at 2.5% right now when inflation is 0%. The real rate is still the same. But you are falling for the Money Illusion yet again Morgan. When considering the fact that deflation is almost here rates are probably too high if anything.

    To put it another way, in your opinion, the 1970s were the best times for savers. The nominal rates were very high. However, the real rates were low. You have fallen for the Money Illusion yet again Morgan. Don’t feel bad. Most people do. Even, sadly, some of our central bank governors.

  28. Gravatar of Bonnie Bonnie
    1. September 2010 at 14:54

    “France never recovered from the 1974/1981 recessions. Will we recover from this one?”

    No. What’s happening in the country now, politically and economically, compared the late 1920s and 30s is errily similar, and there is too much damage being done to AS, as was done back then, by statists in power in vane attempt to boost AD for us to be able to get back to where we were in short order. It’s a nice thought that perhaps we had learned our lessons the first time around after it took 50 years and a lot of inflation pain to get it all sorted out. But the reality is that these statists keep pushing the pendulum farther into consumption portion of the equation at the expense of AS. We cannot tax, borrow, spend, regulate, redistribute and consume our way to prosperity. Many of us already know this, but as a country we don’t seem to have quite learned that lesson yet.

    So yes, if our governemnt keeps trying to deal with the economic problems the same way as it has been, the same way FDR dealt with it, and Nixon too for that matter, we will end up being another France.

  29. Gravatar of Chris T Chris T
    1. September 2010 at 14:58

    “Morgan, Workers don’t need training, they need jobs. They’ll get the training they need on the jobs.”

    New jobs are increasingly technical (those with decent pay at least). A company would be taking a huge gamble to hire someone with no track record in the technologies they use and the employee is unlikely to be useful for some time assuming they have the ability to even do the job. What makes you think you can throw a random worker into a job and train them to become proficient at it?

  30. Gravatar of Morgan Warstler Morgan Warstler
    1. September 2010 at 15:20

    A man has $100 saved in his mattress. He cares if next year it is worth only $95. If he gets less in his basket for the same $100.

    That is not an illusion. There is less in his basket. Who cares about Treasuries? Not him.

    Roman, you aren’t scoring points, I promise you I’m able to see your feeble mental stereogram, this isn’t complicated. We want people to feel cozy saving 10% of their earnings a year… it is wholly unacceptable to spew them some BS that they should buy treasuries falsely advertised as paying 7.5%.

    If you tell a man the money in his mattress is worth $95 next year, he will begin to behave poorly. There is a reason Turkey consumed out-sized amounts of Versace.

    Instead, we force the pressure to build the other way, we lock the inflation rate down – we give people no extra goose to spend it.

    We save, we cut spending spending, we stop printing money, we eschew tax increases, and we turn to the only valid method of growth:

    We seek productivity gains. We seek to make things less expensive in real terms. That same $100, next year BUYS YOU MORE. We take the savings from these gains and we invest it in new things – things that did not exist last year.

    The only thing that makes people better off is new invention with a steep price curve.

    My approach delivers that.

    There IS ONE CAVEAT, ONE A SIDE EFFECT HERE: it means that jobs become more and more specialized, as new processes are created to find savings… that’s doesn’t mean the job PAYS MORE, it means that workers of MUST adapt, MUST be mobile, MUST have a form of unemployment insurance that actually transitions them from specialized job to specialized job.

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. September 2010 at 15:38

    Scott,
    I just delivered Krugman a good spanking. I’m just about to do the same to you. We need monetary expansion now! And this squabbaling needs to stop.

  32. Gravatar of Benjamin Cole Benjamin Cole
    1. September 2010 at 15:38

    Finch-

    Hey, no offense taken.

    But honestly, as an average Joe, which is better–six weeks off a year or two weeks?

    Actually, I prefer less, rather than more, statism.

    But (in line with Scott Sumner’s “bias of the here and now” sentiments of a recent post) I often wonder if we are just thinking what we are supposed to think, or what is conformist.

    I rather suspect people in Europe enjoy their lives, are able to have families, and so very few migrate here anymore.

    Is housing in Paris too expensive? According to this article, housing in Paris averages about $3,000 euros per square meter. I think that is about 10 square feet. So, $300 euros per square foot. Actually, houses in Los Angeles sell for $300 to $500 a square foot. So L.A.=Paris in housing costs.

    http://www.globalpropertyguide.com/Europe/France/Price-History

    Evidently, the Parisan housing market is stable, they have not had a mortgage-bomb. The article suggests they manage their mortgage market better.

    T

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. September 2010 at 16:02

    BTW,
    My first day with upper level econ students at Rowen went extremely well. They get the problem and are are all ears. Let’s get to the solution now!

  34. Gravatar of marcus nunes marcus nunes
    1. September 2010 at 20:16

    “Only 2 mistakes” (in his whole professional life):
    http://krugman.blogs.nytimes.com/2010/09/01/mistakes/
    Which caused a friend of mine to utter the very unPC expression:
    “Krugman is the most argentinian of Noble winners”!

  35. Gravatar of marcus nunes marcus nunes
    1. September 2010 at 20:25

    Mistake #1 in print:
    http://web.mit.edu/krugman/www/speed.html

  36. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. September 2010 at 22:02

    Tom Sargent has some unpleasant arithmetic to add to the discussion:

    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4526

    ————–quote————-
    Our simulations exhibit a force that traps the European worker in unemployment. Unemployment compensation systems typically award you compensation that’s linked to your earnings on your last job; those past earnings reflect your past human capital, not your current opportunities or current human capital. That can make collecting unemployment compensation at rates reflecting your past (and now obsolete) human capital more desirable than accepting a job whose earnings reflect a return on your current depreciated level of human capital. This mechanism sets an incentive trap that induces the European worker to withdraw from active labor market participation.

    Rolnick: Earlier, you said that the European experience with persistently high unemployment over the last three decades fills you with dread about the prospects for the United States.

    Sargent: The prospect that concerns me might sound like I’m hardhearted, but that’s just the opposite of my feelings. What you’ve seen in the recent recession—and it’s quite natural because it’s been so severe—is a tendency of Congress to expand unemployment benefits, over and over again. What Lars and my theory tells us is that if, in the United States, we create a system where unemployment and disability benefits are permanently extended in their generosity and their duration, we will inadvertently put ourselves into the situation that much of Europe has suffered for three decades.
    —————-endquote—————-

  37. Gravatar of james in london james in london
    1. September 2010 at 22:05

    Scott, good to see you are admitting that under your NGDP targetting to get out of the current crisis savers do have take some pain, pain they will really feel, and they won’t feel they are not in pain via any illusions. I do agree that they got some compensation from the high nominal growth rates in the 1990s and 2000s but that wasn’t enough.

    Here’s the rub, in the US and the UK they were forced to constantly chase risk, and competing providers of those returns to savers like banks, “money market” mutual funds, bond funds, structured investment product providers(banks agsin)were also forced to chase risk. Savers and their investment providers certainly found risk. The shadow banking system grew up to cater for this appetite, a system that was 50% bigger than the tradional one.

    I re-read a bit of Milton Friedman’s Free To Choose last night and he nowhere mentions debt bubbles or shadow banking systems. He would have been appalled. What would he have suggested as the solution, the “magic wand” of targetting NGDP to right the wrong, or the invisible (but sometimes) harsh invisible hand of adjustment of deleveraging the debt-bloated US economy. He certainly mentions the pain that has to be taken to cure inflation.

    Sadly, I also to have admit that we are not too far apart in the ultimate economic consequences. Savers will have to take haircuts via lost prinicipal on the deposits in their banks, in their (“never break the buck”) buck-breaking money market mutual funds, on their bond funds having losses on their bank paper holdings. This will posssibly seem more painful than the inflationary tax of targetting NGDP. (I am not sure Morgan and his friends quite appreciates this somewhat less obvious downside of market discipline, but he needs to appreciate that balance sheet shrinkage and deleveraging also involves some reductions on the liabilities side too, starting with equity and moving through sub debt to other unsecured creditors, possibly/probably depositors.)

    That is the choice that faces us in the US and UK and elsewhere. I prefer to get the market sorting this out, failing overstretched institutions and rewarding the less-leveraged ones, and forcing losses on the least prudent savers who chased rates and didn’t do their homework on which funds or banks were prudent. I attended a lunch at the IEA in London a while ago where the former Governor of the Central Bank of New Zealand said he couldn’t see why depositors shouldn’t take 15%-20% haircuts in banks that fail. A good markets man is Donald Brash and a brave one, but maybe Americans (and Brits) will prefer the “magic wand”, I think I know where Milton Friedman would stand.

  38. Gravatar of scott sumner scott sumner
    2. September 2010 at 05:18

    Morgan,

    “Because there is no margin on hiring those currently unemployed. None of them can do the jobs we can provide for the $ we can pay.”

    You seem to have missed a very basic point. During recessions output falls is most industries. After the recession output rises in those very same industries. Look at a graph of auto production over the past 100 years. You think this recession is different? Tell me why?

    Liberal Roman, So Plosser thinks that the fact NGDP grew 11% after the 1982 recession, but is growing less than 4% after this one, has nothing to do with the slow recovery.

    Interesting. . .

    And yes, lots of people confuse nominal and real rates, and also fail to understand that free market rates are low in real terms right now precisely because we are in a deep recession. The Fed’s only to blame to the extent that the Fed caused the deep recession.

    Bonnie, I agree that things are getting worse. I don’t think it is as bad as France yet.

    ChrisT,

    “New jobs are increasingly technical (those with decent pay at least). A company would be taking a huge gamble to hire someone with no track record in the technologies they use and the employee is unlikely to be useful for some time assuming they have the ability to even do the job. What makes you think you can throw a random worker into a job and train them to become proficient at it?”

    Of course there are a few jobs like that, but 90% of jobs people learn on the job. I visited a Wall Street high frequency trading firm recently. They had lots of young math majors there. They all learn on the job. Factory workers learn on the job. So do construction workers. So do restaurant workers, retail workers, tradesmen like plumbers, etc, etc.

    Mark, I agree, Do you have a blog? Where was your Krugman spanking?

    Marcus, Yes, I’d say he missed a few.

    Patrick, Yes, I saw that–it was similar to Barro’s observation.

    James in London, You said;

    “Scott, good to see you are admitting that under your NGDP targetting to get out of the current crisis savers do have take some pain, pain they will really feel, and they won’t feel they are not in pain via any illusions. I do agree that they got some compensation from the high nominal growth rates in the 1990s and 2000s but that wasn’t enough.”

    No I am not admitting that at all. I am a very high saver, and have been hurt by the Fed’s tight money policies. I’d be far better off if an easier money policy produced a robust recovery.

    You said;

    “I re-read a bit of Milton Friedman’s Free To Choose last night and he nowhere mentions debt bubbles or shadow banking systems. He would have been appalled. What would he have suggested as the solution, the “magic wand” of targetting NGDP to right the wrong, or the invisible (but sometimes) harsh invisible hand of adjustment of deleveraging the debt-bloated US economy. He certainly mentions the pain that has to be taken to cure inflation.”

    You are as wrong as one can be. Friedman didn’t have an Austrian bone in his body. His book on the Great Depression was extremely hostile to the Austrian view that we just had to take our medicine because of the inflation we had had.

    You said;

    “I prefer to get the market sorting this out, failing overstretched institutions and rewarding the less-leveraged ones, and forcing losses on the least prudent savers who chased rates and didn’t do their homework on which funds or banks were prudent.”

    So do I, but I also want a stable monetary policy. Is that too much to ask?

  39. Gravatar of Kevin Donoghue Kevin Donoghue
    2. September 2010 at 05:50

    “For various structural reasons, you can’t very well take the minivan to CostCo in Paris.”

    You can take it to Ikea or Conforama or Carrefour. What’s the structural problem here?

  40. Gravatar of spencer spencer
    2. September 2010 at 08:53

    I had thought that for years France had these stores known as “Hypermarkets” that were much like Costco, etc..

  41. Gravatar of Morgan Warstler Morgan Warstler
    2. September 2010 at 12:42

    Scott, the recession started in 2000, and if you accept that CPI is incorrect it started even earlier. People had grown so enamored with the productivity gains thorough the 90′s, we extrapolated on a slope and bet huge on tech, and then took a bath.

    Essentially techgeeks started to consume lots of big houses, concierge services, and luxury goods…. and when they took a beating, those parts of the economy that were built up for boom times, they were supposed to go away too. It was supposed to be pretty painful, we should have seen real unemployment

    It didn’t happen. Look at this:

    http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&tdim=true&dl=en&hl=en&q=unemployment

    Do you remember the tech burst? In what world does unemployment not go back up to 1992 levels in 2002? Massive new productivity gains, wasting the savings, lots of future demand pulled forward, how in the hell, do we not see 8% unemployment? Hmm….

    Finance / Krugman / Greenspan / Fannie Freddie created a culture of low rates + fraud, in order to mainline even more adrenaline right into our throat.

    The underlying recession was still there – but we couldn’t see it – construction workers who should have been getting retrained in another industry, kept building houses, mortgage brokers and real estate agents who should have been getting retrained were flipping houses and eating out. Too many new cars getting built, no money, bad credit, as far as the ye can see.

    We were not saving, we were not focusing like a laser on productivity gains, and all the while public employees were getting paid more and more.

    Now there’s no more juice. The deep structural changes that are required of our economy since 2000 (if not earlier) as our workers earn less money necessitated by foreign competition, are here. The deep structural changes as construction workers go try to become specialized manufacturing workers – because that’s the only way they are worth the maximum of $13 per hour, are here.

    AUTOS: In this regard I support a gas tax to replace corporate taxes…. but forgoing that – Expect to sell less autos made by even fewer people paid even less money…. until the real cost of the car actually starts to go down. Make things cheaper, demand goes up. Rejigger your trend line to head more towards the horizon, run it backwards, and see how much future demand has been pulled forward. We built next years cars, this year. Expect everyone to drive their car for an extra 18 months. Let it go, don’t expect, cheer for, hope for, MORE auto workers.

    It’s going to be ugly. But it doesn’t have to be horrible.

    We’re fortunate that we know for sure that everything is supposed to get cheaper. We’re fortunate that we know for sure, there are clear ways to dramatically restructure those things that keep getting more expensive: education, government, health care. With these items it isn’t about reducing the cost of price inflation, it is about chasing real price decreases.

    The monthly nut for each and every one of us, can be much less without us suffering large scale changes in quality of life.

  42. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. September 2010 at 15:45

    Scott,
    I have no blog because I’m not quite ready for prime time.

    My comment was here. Krugman set up a false dichotomy. I’m sure you would agree:

    http://community.nytimes.com/comments/krugman.blogs.nytimes.com/2010/09/01/the-economic-narrative/?permid=51#comment51

  43. Gravatar of scott sumner scott sumner
    3. September 2010 at 06:14

    Morgan, You said;

    “Do you remember the tech burst? In what world does unemployment not go back up to 1992 levels in 2002? Massive new productivity gains, wasting the savings, lots of future demand pulled forward, how in the hell, do we not see 8% unemployment? Hmm….”

    In a world where the Fed is doing its job?

    You are describing creative destruction, which has been going on for hundreds of years—what does that have to do with the current recession?

    Mark, I do agree.

  44. Gravatar of Chris T Chris T
    7. September 2010 at 11:28

    This is a bit late, but I was camping until yesterday.

    “Of course there are a few jobs like that, but 90% of jobs people learn on the job. I visited a Wall Street high frequency trading firm recently. They had lots of young math majors there. They all learn on the job. Factory workers learn on the job. So do construction workers. So do restaurant workers, retail workers, tradesmen like plumbers, etc, etc.”

    People learn on all jobs. What all of those people had before they took the job was a background that indicated they could be trained for the job. The problem with an increasingly technical society is that the share of people that can be trained for those jobs is shrinking. Unskilled factory jobs have been largely automated away and those created in their stead require a good deal of technical knowledge.

    Companies do not generally value college for training employees but as a way to help them find competent workers.

  45. Gravatar of ssumner ssumner
    8. September 2010 at 16:09

    Chris T, I mostly agree with that. Bryan Caplan has a lot of good stuff on college as a sorting mechanism.

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