Tyler Cowen and Arnold Kling both linked to a National Journal article that implied America had lost (or failed to create) 15 million jobs in the last decade, even apart from the effects of recession.  Go back to April 2008, when unemployment was a quite low 4.9%.  The claim is that even then we were suffering from 10 to 15 million missing jobs.  The data is a bit vague, so it’s not clear exactly how many:

The Great Recession wiped out what amounts to every U.S. job created in the 21st century. But even if the recession had never happened, if the economy had simply treaded water, the United States would have entered 2010 with 15 million fewer jobs than economists say it should have. . . .

The forecasters said [in 2000] that the economy would create 22 million jobs over the next 10 years. At the decade’s economic peak, though, that number stood at only 7 million. Job growth in the 2000s was the lowest of any decade ever recorded by the federal government, stretching back to the 1940s. As a result, workers were extremely vulnerable to the tidal-wave recession that washed away all of the decade’s meager gains.

How could that be?  As a matter of pure arithmetic, missing jobs imply one of two things, a huge rise in unemployment, or a huge fall in the labor force participation rate.  Can you think of a third factor?

Since unemployment was only 4.9% in April 2008 (i.e. normal) there should have been a huge drop in the LFPR between 2000 (which was a red-hot boom year), and 2008.  Yet according to this graph, it looks like the LFPR merely edged down from about 67% to 66% between 2000 and 2008.  I’m surprised the decline was that small, given how the dot-com boom sucked anyone who could tie their shoelaces into the labor force.  Remember what fast food help was like back in 2000?

I notice that the LFPR rose sharply between the 1960s and 1990, I’d guess due to more women working.  Then it leveled off at about 66.5% during 1990-96.  Then it rose to 67% during the dot-com boom of 1998-2001.  Then it dropped to 66%, and leveled off until 2008.  Aren’t there lots of possible explanations for this tiny drop in the LFPR?  Recently I’ve noticed more adult women who could be working, but choose to stay home.  I don’t know if that’s a trend, but Jim Tankersley doesn’t provide us with any of the data we’d need to make sense of the claim about missing jobs.  He may be completely correct; I just can’t see where the numbers come from.

Now if you go up to 2010, then yes, I do see a worrisome loss of jobs.  This shows up as both much higher unemployment (perhaps 8 million lost jobs), and a bigger drop in LFPR (another 2 million lost jobs), both obviously related to the late 2008 plunge in GDP.  I just don’t see evidence that we had a massive jobs problem before the recession.  Does anyone know what data can support Tankersley’s claim, and why it doesn’t show up in either the LFPR, or the unemployment rate in April 2008?

I still think our unemployment problem is about 80% AD and 20% structural problems (99 week UI extension, 40% minimum wage jump, etc) but I have an open mind on the proportions.

PS.  In my earlier housing post, I should have cited this Nick Rowe post on a housing “Phillips Curve.”

Follow-up to previous post (read that first.)

When the tech bubble burst the Wicksellian equilibrium real rate fell to very low levels.  In that situation, the Fed must cut interest rates sharply to prevent a sharp fall in NGDP and a depression.  They did so.  Whether they then raised them fast enough in the middle of the decade is a harder issue, and there are good arguments on both sides.  But I’d like to focus on arguments for a housing boom in 2002.

In a classical world (on the PPF) less business investment should lead to more residential investment.  Some commenters object when I call housing construction “investment.”  Just like real men eat steak and not sushi, real investment is supposed to be factories and infrastructure, not houses.  They see houses as a sort of consumption.  America consumes too much, and houses are exhibit A.  I think this is totally wrong; there is almost no entity that is more “capital-like” than houses.

A can of beer is a capital good that depreciates rapidly as you drink it.  Hence we call it a “consumption good.”  The longer-lived an asset, the more capital-like it is.  In a recent comment section Mark Sadowski made this point:

Isn’t the real consumption of useful capital taking place right now? Menzie Chinn recently alluded to the fact that growth in potential RGDP has probably slowed in the face of a persistent and massive output gap. And I keep reading local news stories about well maintained manufacturing facilities that were highly profitable until just three years ago being torn down because no one expects sufficient demand to come back anytime soon.

This reminded me of just how short the useful life of many so-called “capital goods” really is.  Think computers.  Or factories.  Or even stadiums and basketball arenas.  They actually tear down perfectly good arenas that I recall being touted as new and modernistic in the 1970s.  (Meanwhile the Roman Coliseum is still standing.)  In contrast, my house is 90 years old and perfectly fine.  Around me are many houses 100, 150 even 250 years old.  All still in good shape.  All still producing housing service “output.”

Suppose you were a central planner, deciding what America should do in 2002 to keep people busy (idle hands are the devil’s workshop.)  Business investment is out because of the tech crash.  Two percent of Americans can feed us all.  It used to take 30 percent to make manufactured goods, but even without imports we’d need a far lower number today due to technology.  Soon only about 5% of Americans will be able to produce all the manufactured stuff we need.  Most Americans already have the refrigerators and washers and cars they want.  If I were a central planner, I suggest two uses of labor; more houses and more fun.  People love nice houses with granite countertops (when I remodeled in 1997 I put in formica, and I bitterly regret it every day of my life.)  We all see pictures of dream houses we’d love.  And if we have the things we need, then more services.  Restaurants, hotels and hospitality.  Service jobs.  More houses and more services would seem to have been the best way to keep people busy and boost living standards after business investment crashed in 2002.

It boggles my mind that so many people wring their hands that we might have built a couple of million too many houses over a few years, in a country with 120 million units.  In the grand scheme of this does it really matter all that much if a house built in Phoenix is only occupied for 145 years of its 150 year life, instead of 150 years of its 150 year life?

Some would say “what about the banking crisis, the recession?”  What about them?  Yes, those are the big problems we should worry about.  But they have little to do with building a few too many houses.  Those failed mortgages were mostly re-fis, as people used their houses as ATMs.  Or mortgages on the purchase of existing homes.  The losses to the financial system from people not paying back their mortgage on a newly-built house are way too small to explain the great financial crisis of 2008.  And I already showed the housing slump doesn’t explain the recession, as it occurred way too soon.

It seems like the misallocation of capital into housing construction was a disaster.  Actually it was a minor problem that was correlated with two major disasters, horrible mis-regulation of our financial system that allowed risky loans with tax-insured dollars, and really bad monetary policy that allowed NGDP expectations to fall sharply in 2008.

Those are some really nice new houses out there.  Now let’s print some money so that people can enjoy them.  (But only enough money to get proper NGDP growth, not enough to bail out all the bad investments.)

Brad DeLong might be right.  At the recent AEA meetings he said something to the effect that America has a housing shortage, as many families are doubling up. I thought it was a clever, counter-intuitive way of thinking about the aggregate demand shortfall.

This got me wondering about the commentators who insist that easy money caused America to build a vastly excessive number of housing units, and that’s why there are record housing vacancies today.  It seems to me that when you look at the data, housing construction has not been excessive in the period beginning in 2002, when the Fed allegedly cut rates too low.  See what you think, and as you do so keep in mind that America had 220 million people in 1978, and 300 million by 2008.  So construction in per capita terms has actually had a slight downward trend since 1978 (the earliest figures I could find.)

Source: U.S. Census Bureau

Here’s my assumption.  Housing construction normally seems to fluctuate between one and two million units. Let’s take 1.5 million as roughly the trend rate which keeps up with population.  Yes, it’s true that we exceeded that number every single year from 2002 to 2006, and the total excess production was about 1.87 million units.  That’s a lot.  But over the next four years there was a shortfall of about 2.6 million units.  So why do we seem to have a hugely excessive number of homes, if we are actually 730,000 short?

One answer is a decline in immigration.  A year ago I suggested that the decline in immigration might have played a role in the housing crash.  I think it’s fair to say my theory wasn’t met with widespread acclaim.  So if that’s why I’m wrong today, if less immigration explains our housing surplus, I’ll take it.  At least I would have been right last year, on a point all the pundits missed.

But I doubt that’s big enough to make a major difference.  Even last year I merely suggested it was a contributing factor in the Southwest.  A more likely explanation is that the sharp fall in NGDP led to mass unemployment, especially among the young.  This caused them to start living with their parents, even when in their 20s (something I couldn’t even imagine doing when I was young.)  In that case the problem isn’t that too many houses were built (well actually a few too many were, but they should have been quickly absorbed in a country with 120 million units) but rather too little demand, because people have too little money.  And who determines how much money there is in the economy?

There’s a way to test my theory.  If the other side is right, and we have all these vacant homes because we built way too many in the middle of the decade, then the number of vacant home should have dropped rapidly during the last three years, and especially during the last two years.  The year 2008 was the first year below a million since my records began in 1978 (and probably much earlier.)  That’s clearly below any reasonable estimate of normal absorption.  Then in 2009 and 2010 we were down close to a half million units, a mind-boggling low rate of construction.  Vacancies should be plunging under any reasonable estimate of market absorption.  But guess what, over the past three years there has been no decline in housing vacancies (assuming I am reading the 5 year version of this graph correctly); vacancies have leveled off since March 2008 at just under 19 million units, up from 16 million in early 2006.

Given ultra-low construction, and US population growth of about 3 million/year, there is only one explanation for that pattern.  Astoundingly low demand for housing.  Do young people actually enjoy living with their parents, or might America be experiencing an aggregate demand shortfall?

Another reason we need more NGDP.

This was spurred by a Chicago alumni magazine article that made the following claim:

Economic recovery will be slow, [Erik] Hurst says, because the massive misallocation of resources that the housing boom created cannot be quickly remedied. During the ten years after 1997, he said, 40 percent more housing was constructed in the United States than in any decade on record. Today 2.3 percent of single-family homes are vacant, an increase of more than 64 percent since 2005.

The housing oversupply, in turn, has contributed significantly to high unemployment. As the construction industry boomed, much of the American workforce shifted to housing-related industries, on both the construction and banking sides. Now, of 3 million open jobs in the United States, only 65,000 are in housing-related fields, Hurst said. Thus, many unemployed workers are qualified for jobs that are no longer available””jobs, he predicts, that won’t come back.

This is completely inaccurate.  As you can see from the table, housing construction in 1998-2007 was only 8.4% above the levels of 1978-87.  And it was much lower in per capita terms.  The 2.3 million single family homes that are vacant are probably little changed from a few years ago, whereas the number should be plunging with low construction.  There is no reason construction jobs shouldn’t come back, unless we shoot ourselves in the foot.  As I showed, housing construction in the past decade has been below normal.  If all you knew was the housing construction data from the noughties, you’d expect another 1.5 million homes a year to be built in the teens, just like other decades.  I’m not saying that will happen.  Indeed I think it won’t happen.  But if it doesn’t there will only be two possible explanations; a crackdown on immigration or a prolonged NGDP deficiency (perhaps combined with supply-side problems with the labor market.)  It won’t be because we built too many houses in the 2000s.  We didn’t.

PS.  Please do not tell me about local housing markets.  I am claiming America has too few homes; I completely agree that Detroit and Vegas have too many.

Paul Krugman recently started off a post as follows:

I’ve been watching with sympathy as David Beckworth and Scott Sumner discover that their updated monetarism actually puts them on my side of the great ideological divide “” cast into the outer darkness along with John Maynard Keynes and Milton Friedman.

But what does the other side believe? Someone, I don’t know who at this point, sent me to this post by Robert Murphy, which is the best exposition I’ve seen yet of the Austrian view that’s sweeping the GOP

I certainly understand the point Krugman is making, and in a sense I agree.  But I also think this slides over a much more important ideological divide; one I still don’t fully understand.

Suppose you asked the top 100 macroeconomists in America whether they were with the 5 economists in the first paragraph, or Bob Murphy.  My guess is that at least 90 would be with us (and yes, that even includes new classicals like Robert Lucas.)  So the “outer darkness” is not all that lonely a place.

But here’s what I don’t know.  Why weren’t those 90 macroeconomists out picketing the Fed in October 2008, demanding easier money?  Well 89 of the 90, the other is in the Fed.   Back in late 2008 and early 2009 a few of us quasi-monetarists were just about the only people insisting on the urgent need for much more monetary stimulus.  A tiny handful of others (including Krugman) half-heartedly agreed it was worth a shot, and almost everyone else completely ignored monetary policy.  One argument was they assumed we were at the zero bound.  Actually, we weren’t at the zero bound in October 2008, but let’s say we were close.  The main problem with the zero bound argument is that there was no general understanding that monetary policy was ineffective at the zero bound among the macro elite.  Indeed many of them (Bernanke included) argued forcefully that the BOJ needed to do much more in the late 1990s and early 2000s

I seem to recall Krugman once saying something to the effect that Bernanke discovered things were much harder than it looked from the outside, once rates hit zero.  Yes, that’s right, but the thing Bernanke found out was not that the ideas he gave the Japanese don’t work, he found out that it was difficult to get his colleagues to agree to implement those ideas (or at least that’s what I assume.)   But whatever you think of Bernanke, none of that explains the behavior of the 89 economists discussed above.  Why weren’t they speaking out?

The reality is that the Fed almost always does roughly what the broad consensus of macroeconomists thinks they should do.  In late 2008 and early 2009 those 89 macroeconomists didn’t think we needed more monetary stimulus, or if they thought so didn’t speak out (I’d guess Svensson would have agreed with me.)  Naturally the Fed didn’t provide the needed monetary stimulus.  If the consensus of the 89 had been that QE2 should have been adopted in November 2008, not November 2010, it probably would have been done then.

I still don’t think the views of Murphy have broad acceptance among elite macroeconomists (if they do God help us.)  They certainly didn’t in 2007.  The big mystery is not explaining wacky views of Austrian bloggers and GOP economists who hope to get a gig as Sarah Palin’s chief economic advisor, but the broad mainstream of Ivy League macroeconomists.  I just did a post showing that Charles Calomiris opposed QE2 even though his rationale suggested it was needed.  Earlier I did a post showing that Frederic Mishkin did not think Fed stimulus was inadequate in late 2008 and early 2009, even though the key insights of his textbook clearly and unambiguously suggest it was.  Indeed the explanation of the crisis added to the 8th edition of his textbook is completely contradicted by his 4 key insights into monetary policy, which come just one page later!  I recall a talk by Robert Lucas a couple years ago, where he mentioned how in this situation the Fed needed to boost the money supply to offset a fall in velocity, but then for some strange reason suggested he though Bernanke was doing a good job.  I could go on and on.

The big mystery Krugman should investigate is not why people like Bob Murphy hold wacky opinions, but why his fellow elite macroeconomists seemed to suffer from mass amnesia in late 2008 and early 2009.

Krugman makes this observation later on:

Why is there such a strong correlation between nominal and real GDP? Why is there overwhelming evidence that when central banks decide to slow the economy, the economy does indeed slow? And on and on.

I’d love to know why our elite macroeconomists were not loudly demanding that the Fed do something to prevent (in 2009) the biggest fall in NGDP since 1938.

BTW, I appreciate the support from Paul Krugman; despite our previous disagreements I consider him the most brilliant macroeconomist in the blogosphere.  But I was slightly bemused by his comment that I had just “discovered” I was on Krugman’s side regarding demand shocks.  I feel like I’ve been here all along.  I can’t help remembering when I tried to remind Paul Krugman that we were (should have been?) on the same side in March 2009.  As Matt Yglesias pointed out, on the issue of monetary stimulus it is others that need to do some soul-searching:

The Great Recession has revealed a lack of capacity for dealing with monetary issues to be a major institutional weakness of the progressive movement.

Matt himself doesn’t lack an understanding.  I’d like to think that’s partly because he reads quasi-monetarist bloggers.  You know, the ones who said that rumors of QE2 would depreciate the dollar, raise equity prices, and raise inflation expectations—months before rumors of QE2 actually did depreciate the dollar, raise equity prices, and raise inflation expectations.

I suppose this sounds like I’m being a poor sport.  Two positive mentions in a row from Paul Krugman!  Let’s celebrate that fact and not look back on unpleasant memories that are best forgotten.

🙂

There has been a recent upswing in conservative articles discussing the idea of going back to some sort of gold standard.  I don’t think people realize how dangerous this idea is.  You can’t just “give it a shot” and see how it works out.  It’s like marrying the daughter of a Mafia chieftain–you need to be very sure you are willing to commit.

A true gold standard (not Bretton Woods) allows Americans to buy or sell gold.  If you are not 100% committed to staying on gold, but instead hint you might devalue the dollar at some point, people will dump dollars and buy gold.  The increase in demand for gold will raise its value, or purchasing power.  This is deflationary under a gold standard, where the nominal price of gold is fixed.

Nor is this merely a theoretical problem.  There were large bouts of private gold hoarding during four periods of the Great Depression, all associated with devaluation fears; the last half of 1931, spring 1932, February 1933, and late 1937.  All four were associated with economic distress, falling stock and commodity prices, etc.  And there is event studies-type evidence showing causation going from gold hoarding to deflation.

It’s not easy to know which price of gold would be appropriate.  Perhaps market gold prices would go to the right level after an “announcement” of a return to gold, but even that depends on the announcement being 100% credible.  But after you re-peg, the real value of gold can change due to industrial demand shifts, even if there is no monetary hoarding of gold.  Furthermore, all countries are not likely to follow the US back on gold, so you might have monetary gold hoarding in Europe, as people feared for the euro.  Booming Asia might increase the industrial demand for gold, just as it has raised the demand for many other metals.

And there is little room for error.  A 10% increase or decrease in the real value of gold seems very small when it is just a commodity.  But under a gold standard that sort of shift can be accommodated only by changing the overall price level by 10%.  A sudden 10% rise or fall in the price level is very destabilizing to the economy.

Even if the government is committed to gold, investors may fear the next government won’t be (remember FDR?)  In that case the promise to stay on gold may not be credible.  In the old days there was a powerful emotional attachment to gold, as paper money was feared as inevitably leading to hyperinflation.  Only then will voters be willing to suffer austerity to stay on gold.  A modern analogy is the long painful struggle of Argentina to stay on its currency board during the 1998-2001 deflation, attributable to a fear they would return to hyperinflation.  But we now know that fiat money can produce modest inflation rates, so our voters won’t undergo the pain of the mid-1890s, or early 1930s, just to stay on gold.  And if you aren’t willing to undergo that pain, the system won’t work.

Some supporters point to Bretton Woods, but that “worked” in direct proportion to the extent that the gold constraints were ignored.  Gold was highly overvalued after the 1933 devaluation, and then the US grabbed a huge share of the world’s gold in the run-up to WWII.  After the war those two factors gave us an unprecedented amount of slack, where we could mildly inflate until gold was no longer overvalued.  Once we reached that point in the late 1960s, the system immediately fell apart.  It would have collapsed even sooner if Americans had been allowed to own gold.  And if LBJ had tried to deflate to stay on gold, Americans (if allowed to) would have hoarded gold in the (correct) expectation that the next president would devalue the dollar, putting expediency ahead of principle.  That hoarding would have had the same effect as the hoarding of the early 1930s–deflation and depression.

HT:  Bruce Bartlett

PS:  Today’s NYT said:

Economists are now engaged in a spirited debate, much of it conducted on popular blogs like Marginal Revolution, about the causes of the American jobs slump. Lawrence Katz, a Harvard labor economist, calls the full picture “genuinely puzzling.”

If you check the four links you won’t find me, but the link to MR (Alex Tabarrok) starts as follows:

I find myself in the unusual position of being closer to Paul Krugman (and Scott Sumner, less surprising) than Tyler on the question of Zero Marginal Product workers.

Close, but no cigar.  Still I guess it’s progress being just “one degree of separation” away from the Times.