Krugman on unemployment
Paul Krugman has a very good post explaining why the unemployment problem is mostly demand-side, not structural. The regions where unemployment rose most sharply have seen the fastest declines during the recovery. The occupations where unemployment rose most sharply have seen the fastest declines during the recovery. (He also cites work by Edward Lazear.)
In my view the fall in unemployment from 10% to 7.4% is nearly 100% a cyclical recovery. The next 2% will be more interesting. Suppose unemployment falls to 6.2% and then gets stuck. Then Congress decides that precisely because the unemployment rate has fallen they will cut the maximum UI benefit back from 73 weeks to 26 weeks. (Or maybe it happens automatically.) Then unemployment falls further to 5.4%. Questions:
1. Is the extra 0.8% fall in unemployment due to demand stimulus or structural reform?
2. And while we are at it, is the steady growth in employment this year despite austerity due to the fact that the fiscal multiplier is zero because of monetary offset, or because the fiscal multiplier is positive but the effect is offset by easier money?
3. And how many angels can dance on the head of a pin?
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3. August 2013 at 15:33
Scott says…”In my view the fall in unemployment from 10% to 7.4% is nearly 100% a cyclical recovery.”
Because of “use, decay, and obsolescence” ?
Not QE ? Is that yet to come ?
3. August 2013 at 16:33
Prof. Sumner,
I wrote:
“I know that Ryan Avent has raised concerns that, since we now live in a low-interest-rate world, we’re far more likely to fall into liquidity traps over, say, the next 50 years. As a result, I think he would prefer a long-run rate of inflation of 3% or 4% to make liquidity traps less likely. I think the higher inflation rate would provide more of a “buffer.”
At any rate, isn’t Avent’s concern now way way way less urgent now that all these huge oil discoveries and innovations are being achieved in the U.S.? Aren’t potential oil shortages the main thing that could cause a big enough supply shock to throw the U.S. back into a liquidity trap?
I understand that tight money from the Fed that reduces NGDP growth is the main threat that could throw us into a liquidity trap. But won’t they only do that if the U.S. suffers a severe supply shock?
I’m not sure what else could be as damaging as the 2008 oil shortages. Huge terrorist attack / hurricane / earthquake?”
And you replied “Travis, The oil will help a little, but I doubt it makes a big difference.”
It would be helpful if you provided clarity on this matter.
According to my line of thinking, the big problem holding back the economy is that the Fed is unwilling to tolerate higher inflation.
Specifically, if a huge supply shock happens, they’re unwilling to allow inflation to increase to, say, 4%. As a result of their inflation intolerance, NGDP growth craters well below trend.
Given that “unwillingness to tolerate inflation” in the face of a huge supply shock is the main problem, it seems logical that the recent big oil discoveries make this problem, and thus future recessions, much less of a concern.
But you disagree. Where has my thinking gone wrong here?
3. August 2013 at 17:57
Bill, QE has merely prevented an even deeper recession, as in the eurozone. The recovery is from wage moderation.
Travis, Two points:
1. I doubt the oil boom will significantly impact US aggregate supply. It will have some impact, but it will be small.
2. The Fed could do more today even with the 2% target–I’m not sure what’s holding them back. Inflation is under 2% and they are about to tighten.
3. August 2013 at 18:01
Krugman thinks the solution to the “cyclical problem” is Fiscal Simulus.
Lazear thinks that to solve the cyclical problem the Fed needs to abandon its loose monetary policy!
http://thefaintofheart.wordpress.com/2013/06/06/monetary-incompetence-begets-the-jobs-disaster/
3. August 2013 at 18:01
I just do not understand the argument that one day in 2008 about five percent of the adult population of the United States decided it did not want to work anymore.
And structural problems? I thought the free market system was famed for its flexibility, adaptiveness. People got OTJ and handled new kinds of work. New businesses popped up in those sectors that were growing. That all stopped in 2008?
Aggregate demands seems like the logical explanation, as in not enough, and yes SSDI and extended unemployment.
Another oddity: The FRED charts on corporate profits are astounding. Absolutely astounding. Sumner should do a post on corporate profits, though what it should say I do not know.
In the great 1990s, corporate profits never topped $600 billion a year. They spiked under Bush jr, to $1400 billion, then collapsed in 2008. They are up to $1800 billion a year now. By every measure, absolute or relative, corporate profits are at record all-time highs. This is great news, btw.
Another sign of Obama’s cluelessness on the economy: Not only has Obama gone brain-dead on Fed appointments, but corporate profits hit all-time record highs and he does not try to take credit for incredible booty piling up in corporate America.
3. August 2013 at 18:05
[…] Krugman has a new post–which Scott Sumner calls “very good”–in which he explains why the structural explanations of the recession don’t fit the […]
3. August 2013 at 18:07
Scott, would be curious to see your take on the mini-recession of late 2005. People in Louisiana forecasted below-trend state GDP growth for a few months?
3. August 2013 at 18:09
Bob, Katrina?
3. August 2013 at 20:58
Yes, that’s the point of the post, Scott. So, is Katrina a demand-side or a supply-side explanation for the Lousiana vs. US-ex-Louisiana unemployment situation in 2005?
Assuming you agree it’s supply-side, what does that do to Paul Krugman’s “very good post” on structural vs. demand-side explanations of the Great Recession?
3. August 2013 at 21:17
Benjamin, wouldn’t regime uncertainty explain high corporate profits and low growth?
3. August 2013 at 22:25
I’m uncertain how PK can look at unemployment stats and hope to gain insight on structural matters. The unemployment figures purposefully exclude “structural” unemployment – long-term discouraged workers.
E-P would capture what I think they complain about as structural problems. But the issue PK ought to try to address, at least, is participation. Students and retirees are not the problem, and there is a problem. The problem is tight monetary policy and low NGDP.
http://research.stlouisfed.org/fred2/graph/?g=laJ
BTW, nonfin corporate revenue % NGDP has been declining. Labor compensation % corporate revenue has been declining faster. Declining compensation share of revenue explains 90% of the rise in corporate profits.
In a nutshell, a tight Fed crushes labor compensation more than it crushes revenue, with lower corporate interest expense adding an extra profit windfall.
http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=55
“Structural problems” is a byword for “look at my ad hoc hodgepodge of hand-waving, and pay no attention to the tight monetary policy behind the curtain”.
4. August 2013 at 04:41
Bob, There’s a difference between a temporary supply-side problem and the sort of permanent structural increase in unemployment that people are claiming to see.
jknarr, Yes, there may be structural problems not picked up in the unemployment rate, but he’s responding to those who claim the 7.4% unemployment is structural.
4. August 2013 at 04:57
Kebko-
Not sure. Profits first skyrocketed in the Bush Administration. Maybe you could say corporations were worried post 9/11, or that we were in two wars, nether one winnable or even end-able for a long time. Then we had financial collapse-deep recession, and then Obama unbusiness-friendly, and then even more cash hoarding.
But really–we are talking $1800 billion a year, up from $1400 billion in the best Bush days, and $600 billion in the hot 1990s. Nobody was crying about profits in the 1990s, and now we are at three times that level.
It is Fat City in Corporate America.
I think my point is, if the USA has new structural problems that prevent employment, it sure is not showing up in corporate profits.
Indeed, if you only looked at corporate profits you would assume very positive structural changes were implemented in 2000, and profits have been booming ever since, except for the Great Recession.
4. August 2013 at 08:33
“The regions where unemployment rose most sharply have seen the fastest declines during the recovery. The occupations where unemployment rose most sharply have seen the fastest declines during the recovery.” [Geoff: Dr. Sumner, I think you meant to say “increases”, not “declines” here.]
As I mentioned in my previous post about the foundation of economic theories not being historical data, but self-reflective ratiocination and deduction, the historical data above about the various rates of employment changes *also* does not prove or disprove what Krugman (or Sumner) believes it proves or disproves.
If there *is* a structural problem in the economy, then it is not controversial or problematic for structural *theory* that we observe what we have observed. For the structural problems can *persist*, and be re-ignited, due precisely to Bernanke reinflating the money supply and hence delaying a true recovery. It is not surprising that we observe a quicker change to employment before and after the reinflation in those industries hit hardest during the temporary deflationary period.
Suppose there are too many workers and resources in the nail industry, say, and not enough workers and resources in the retail industry, say, due to previous non-homogenous inflation from the central bank distorting the capital structure.
Now suppose that there is a deflation, and it negatively affects the more capital intensive, more interest rate sensitive nail industry *by more* than it negatively affects the less capital intensive, less interest rate sensitive retail industry.
This is similar to what we observed 2006-2013:
http://research.stlouisfed.org/fredgraph.png?g=lbm
This is the result of deflationary forces having more of a negative impact in industries that were being propped up by previous inflation.
It makes sense that those industries that suffered the most during the temporary deflationary period, should be the quickest to “recover” during the reinflation. It takes time for workers to be retrained, and to gain new experience. If a deflation is temporary, after which there is again inflation, then the same forces that put those workers in those industries in the first place (unduly) will again arise.
Imagine two individuals, one a crack addict and one not a crack addict. Suppose that suddenly crack is no longer ingested. The crack addict would feel the most relative pain in his life, from the fact that crack is no longer being ingested. The crack addict would also find any pain to go away quicker once the crack ingenstion takes place again.
According to Krugman/Sumner logic, this is proof that the problem isn’t the effect of crack on the body, that is, the “real economy”, but rather, insufficient crack ingestion. After all, the person who felt a lot of pain during the crack austerity, was the quickest to recover once crack was dealt again.
I will repeat this once again, and hopefully it sticks this time:
One can never ever prove or disprove any economics theory by reference to historical data. Economics is not like physics. In economics, already accepted theory in a person’s mind is what is required, and what is always being used, *to understand* historical economic data. Theories don’t arise from data. Theories are a priori to data. One cannot even make sense of economic data being data, without a pre-existing economics theory.
The question is whether one’s theory is correct or incorrect, *independent of the historical data*, that is, grounded on something other than history.
Dr. Sumner has been corrected many times about falsely claiming or assuming that his theories have monopoly explanatory power over historical data. He ought to recognize that all historical data have multiple competing theories that are consistent with it. It’s just so hard for him to see this because he is so wedded to his theory that he can’t even pretend to use another theory to interpret the data. He has his theory, and that’s it. Well, you’re ALWAYS going to find that your theory is “proven right” by the data if you approach economics that way. If your theory is wrong, then you will always be wrong if you believe it can only be disproven by historical data.
4. August 2013 at 08:38
[…] there is no consensus, as Paul Krugman (citing the work of conservative economist David Lazear), Scott Sumner, Dean Baker, and Brad DeLong all note. Second, the reason there is no consensus is because there […]
4. August 2013 at 09:23
“Yes, there may be structural problems not picked up in the unemployment rate, but he’s responding to those who claim the 7.4% unemployment is structural.”
If one claims that an aggregate deflation coupled with sticky wages produces unemployment, then one cannot also claim that it’s only, or primarily, or even in part, a “demand side problem.”
For the theory that the problem is the structure of the mechanism of wage payment and receiving that is “the” problem.
One could devote one’s intellectual capital to figuring out how to encourage others to make wages more flexible, and solve the greatest portion of that which causes unemployment.
It would be superior relative to the method of tricking people into believing that their wage demands are justified, when they are really not. Not only will it encourage others to make wage payments more flexible, but it will also avoid the structural problems that arise on the foundation of inflation.
4. August 2013 at 09:52
“One could devote one’s intellectual capital to figuring out how to encourage others to make wages more flexible, and solve the greatest portion of that which causes unemployment.”
Good like trying to change the earth’s orbit, instead of adapting for winter.
“It would be superior relative to the method of tricking people into believing that their wage demands are justified, when they are really not.”
American workers work longer hours than most people in Europe, or Japan, yet their share of real disposable income has fallen from 1980-2013. It takes a lot of chutzpah to say that their real wage demands are not justified, given that their productivity has risen, and the wage -productivity gap is higher than ever.
Also I don’t agree with the “tricking” part. Its entirely possible for real wages to RISE during the recovery, as cash holder spend their cash, putting into place a “reverse” real balance effect.
4. August 2013 at 09:58
Good “luck” trying to change the earth’s orbit
4. August 2013 at 10:14
Geoff,
Don’t you ever get tired of yelling “Repent, commies – or face the wrath of Mises” ?
4. August 2013 at 10:40
“Don’t you ever get tired of yelling “Repent, commies – or face the wrath of Mises”?”
I get exhausted beyond all recognition. I mean, I put so much effort into this that I can barely feed myself. I wear a cape, and I use a megaphone to shout from the street corner. And oh, I also wear a tinfoil hat.
Oh god, oh god, please stop. The agony. Oh whatever will I do.
4. August 2013 at 10:47
Edward:
“Good like trying to change the earth’s orbit, instead of adapting for winter.”
TIL that human choices do not exist, that everything we do is in accordance with inexorable laws of nature. The future is inevitable.
I watch as Edward’s head explodes in claiming Geoff is “wrong” about anything he says.
“American workers work longer hours than most people in Europe, or Japan, yet their share of real disposable income has fallen from 1980-2013.”
Inflation benefits the wealthy (capitalists) at the expense of the poor (workers).
“It takes a lot of chutzpah to say that their real wage demands are not justified, given that their productivity has risen, and the wage -productivity gap is higher than ever.”
It takes a lot of shutzpah to claim that $100 million an hour wage rates are justified, at that it is up to the central to print enough money to “accommodate” it.
Oh that’s right, I don’t claim anything about what is justified and what is not justified, outside of a free market context, which of course means if wage rates fall in a voluntary system, then those fallen wage rates are justified.
“Also I don’t agree with the “tricking” part. Its entirely possible for real wages to RISE during the recovery, as cash holder spend their cash, putting into place a “reverse” real balance effect.”
Increasing spending of money doesn’t drive economic growth. Saving and investment in a context of sustainable relative market pricing is what drives it.
Inflation hampers this process because it introduces effects into pricing that are not the result of subjective preferences constrained to the market, but rather introduce a non-market component to pricing that investors, consumers, everyone, cannot parse into “market” and “non-market” components.
Hence the recurring booms and busts.
There is “tricking” going on because if everyone really understood how inflation will affect the incomes of not only their own, but those they compete with, then inflation would end up having zero effect whatsoever.
It is precisely because inflation tricks people that it ends up having effects that you interpret as inflation “succeeding”.
4. August 2013 at 10:53
Put it this way Edward.
Suppose you get hired for a job about 6 months after Bernanke eases the money supply. Suppose that your job is to produce goods that require resources that are actually more valued elsewhere by the consumers.
Given that for a time you are earning an income, can you know what component of your income is driven by actual relative marginal demand for those goods, and which component is driven by inflationary effects on wage rates which altered the perceived suitability of investing in that which your experience is well suited, versus some other investment alternative?
The truth is that you cannot know for sure what component of your income is driven by its relative market value constrained to the market process, and what is driven by a mistaken judgment of relative market value because of what inflation does to relative pricing and spending in its own right apart from market valuations.
This is why the boom and bust keeps occurring. Even if you suspected your relative income is driven primarily by inflation instead of relative market value, the fact that you continue to earn that money and continue to produce what you are producing, the fact that you would rather work now in a job that might be unsustainable, rather than quit and seek a job that you suspect might be sustainable, i.e. the profit motive, is why inflation keeps “tricking” people in general.
4. August 2013 at 12:53
Benjamin Cole,
I would expect any structural impediments to employment to increase corporate profits. I don’t understand why you are perplexed by this. If implied liabilities and legal uncertainties are added to the cost of labor, or if higher fixed costs for employers limit entry of competitors, then corporations would require a higher rate of return in order to take on new employees.
5. August 2013 at 05:58
Benjamin Cole,
Is it possible there is a connection between corporate profitability and higher unemployment? In the face of uncertainty, companies have battened down the hatches- unlike six years ago, existential risks are now part of the calculation and fewer companies are swimming naked. Only now, as the situation firms, are firms cautiously adding staff.
Like you, I think this is a good thing. Less fragility. How many jobs in 2000 (or 2007) were tenuous at best? Record high labor force participation and low unemployment. I don’t see how the madness of fiscal policy (and housing policy) from 2001-2007 isn’t the obvious smoking gun here. We went into the last recession with a lotta chambers empty already.
7. August 2013 at 08:08
[…] Sumner, “Krugman on unemployment,” The Money Illusion, […]
23. September 2013 at 09:24
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