Or, why the Fed should not raise interest rates in September.
The BLS reported that 255,000 jobs were added in July. The New York Times ran a story quoting Michelle Meyer of Bank of America Merrill Lynch saying, “This was everything you could have asked for, maybe more.” The unemployment rate held steady at 4.9 percent, and wage growth has finally picked up a bit, growing at 2.6 percent year over year. After years of nominal wage growth that barely kept up with inflation, 2.6 percent represents real gains, if only just so.
The underlying threat to any good jobs report over the last few years is that the Federal Reserve will potentially overreact and raise interest rates prematurely, just as the recovery is gaining steam, and despite constant threats to recovery from a tumultuous world. I am not in the Fed prediction business, but prior to the release of the report, Fed watcher Tim Duy stated that July’s FOMC meeting was really just laying the markers for a showdown between hawks and doves in September, and with July data now in hand, a good jobs report may make it untenable to push off on raising rates again. September may be the month interest rates go up to 0.50%.
Why do I worry that the Fed raising rates in September is premature?
It’s true that job growth was strong in July. And it’s also true that the unemployment rate stands at 4.9%, which might normally be considered full employment, which is the unemployment rate where people think things can’t get much better without inflation spiraling upwards.
But, there are a few charts and data points that better describe the status of the labor market than the headline unemployment rate, and they show that the recovery from the greatest recession since the Great Depression is still far from complete, and that there is no sign of inflation getting out of control. The downsides of not raising rates, then, are minuscule compared to the downsides of raising rates, which could harm the still fragile and incomplete recovery.
The headline unemployment rate doesn’t count a lot of people who have exited the labor force: if the jobs just aren’t there, people don’t look, and thus aren’t included in the relevant denominator of the calculation. The BLS thankfully calculates an alternative measure: the unemployed (those actively looking for work but not employed) as well as those who are part-time for economic reasons, plus those who are “marginally attached” to the workforce. This latter category includes those who are available for work, but who didn’t bother looking for various reasons, including the belief that there were no jobs available.
As of July of 2016, this expanded-definition unemployment rate stood at 9.7%, much higher than the troughs in the previous economic expansions at 7.9% in December of 2006 and 6.8% in October of 2000. The usual suspects argue that this is structural: that there is a mismatch of skills, and that this is just the new normal. But these people were wrong at the start of the recovery, and there are few reasons to believe they are right now.
The employment-to-population ratio for ages to 25 to 54 is another metric that is more informative than the headline unemployment rate. This “prime-age” ratio captures employment in the part of the population you’d like to see employed. It captures similar trends to what we saw in the expanded unemployment rate: again, we see an incomplete recovery:
The peak in the prior economic expansion was 80.3%, and we are still at 78.0%. There’s clearly been improvement, but there’s also still quite a bit of ground to make up. A back-of-the-envelope calculation shows that if an employment to population ratio of 80% represents full employment, and the estimated population ages 25-54 stands at about 125 million, then we are still short 2.5 million jobs.
I hopefully have convinced you that there’s still considerable slack in the job market. Is inflation the metric that is then pushing the Federal Reserve to raise rates?
Various measures based on the consumer price index (CPI) make it hard to think inflation is getting out of control. I plot a few here for reference:
Median CPI and 16% trimmed-mean CPI, both intended to get at the momentum or inertia of inflation without being affected by volatile outliers like food and energy, show 2.2% and 1.9% inflation, respectively, in June of 2016. This is right around the Fed’s target (and one could argue the target is far too low).
So: inflation is right around the 2% target, and there’s still significant slack in the labor market. What, then, is the hurry?
There are conflicting visions of a future with autonomous driving. One version seems to focus on a select few benefits: expanded availability to disabled, elderly, and perhaps even children, vastly reduced traffic deaths (they were on the order of 30,000 in 2014), and the possibility that you won’t have to own a car at all: you’ll simply summon one when you want one. An article from The Atlantic’s City Lab seems to focus on this latter point and its potential impact in disrupting public transit systems: why would anyone ride public transit at all?
Yet as I think about a possible future with driverless cars, it seems more likely that people will continue to own their vehicles, as this is the primary way the median American travels to and from work. There are probably deep cultural reasons somewhere in there too. The article has some interesting notes, and it seems to me that very few people are thinking about how autonomous driving technologies would implement into public transit systems in cities.
In fact, if driverless cars encourage a large class of people to ride in cars more frequently (they no longer have the pain of driving themselves, and can focus on work or some other form of leisure in the car), then things like commute times and congestion (and possibly pollution, absent greater gains in emissions technology) may become an even greater problem. The only solution to this problem, electric cars or not, autonomous driving or not, is increased investment in public transit.
So what happens to public transit? Potentially, implementing this autonomous driving technology could eliminate or greatly reduce the share of labor costs in public transit. A bus can be added to a route without hiring a person with a pension, health benefits, and overtime restrictions. This could be good from the perspective of a commuter: costs would be more predictable, service could be expanded, and chronically underfunded systems could potentially have more cash to invest in infrastructure and maintenance. Adding a bus route used to depend on the fixed cost of potentially buying a bus and the variable cost of adding a worker to drive the bus for certain hours of a day. Without a worker, the bus would sit idle. Now, the sole essential cost is a fixed one (or the role of labor costs would be much smaller, perhaps limited to inspection and repair). Furthermore, pre-set bus routes seem more predictable and easier to implement in the autonomous driving algorithms as compared to the many additional challenges faced with a personal car, where the destination could literally be anywhere. Fewer edge cases would be encountered.
This is one possibility. Yet another is that companies like Uber, which are investing heavily in a driverless future (few people mention the dark motivations of this: Uber doesn’t want to deal with the headache of having actual employees), could take advantage of the current state of affairs in public transit. It’s not hard to imagine that the acrimonious relationship between many cities and Uber could be changed: tired of dealing with labor unions in the public transit sector and chronic under-service, they make a deal with Uber to start providing some bus-like services. And so the privatization of government services in American society may continue. This may seem crazy right now, but I have to think that companies like Uber and Lyft are thinking beyond their current model. They have already thought of car pooling, and they are already investing in driverless cars to rid themselves of the headache of dealing with actual employees. It may not be crazy to imagine Uber getting into operating its own line of buses as cities turn desperate.
Another interesting question that comes out of all of this: what happens to the jobs? Public transit systems are heavily unionized, and the relationship with the public is ambivalent in many ways. A job that provides generous benefits and a living wage should be applauded: on the other hand, in a society where median wages have stagnated and living in many urban centers has grown more expensive, fewer and fewer think “we should try and get what they have”, and instead think “if we don’t have it, neither should they.” Having lived through several public transit strikes where service was largely shut down by unions, bringing city life to a standstill, I have some sense of the complex feelings involved.
So then in 30 years, when the occupation of driver (whether bus, taxi or truck) has disappeared, where do these millions of workers transition to? It has been a fallacy throughout history to decry technology as destroying jobs on net: new industries arise from the gains in technology and productivity and fill the gap created by the destroyed industry. But so far, I have seen very few imagine what this future would look like, and where these jobs might appear. Instead we hear about a future where the Silicon Valley unicorns and monopolies gradually solve all of society’s ills. Furthermore, even if new industries appear, we have learned over the past few decades just how hard transitioning careers can be, and how permanently harmful the process can be to one’s lifetime earnings (not to mention psychological well-being). Research by David Autor has also shown that jobs have become increasingly bifurcated: a hollowing out of middle-class jobs and an expansion in low-wage jobs, and to a lesser extent, highly skilled jobs. And has the role of technology fundamentally changed, moving from something augmented by labor to something completely substituting for labor?
If it’s going to happen, it’s going to happen. But the future to aim for is one where institutions are robust and able to handle the future’s potentially massive job losses, and one that doesn’t envision a personal car for every person who can afford it, exacerbating congestion issues and disadvantaging the poorest. As the population grows and technology becomes potentially more disruptive to the workforce, investments in infrastructure and accessible education should be made a priority. Out of all the claims made by Silicon valley types about the huge technological advances just around the corner, autonomous driving seems to be the one that might actually come to pass. It’s better to be proactive if we know the changes are coming.
How can CEOs, management and boards of directors have their interests aligned with the long-term health of the companies they run? How can their interests be aligned with the interests of their employees?
I’m grappling these questions as I look to a few glaring cases of capitalism gone wrong, and I am wondering why boards of directors ultimately do what they do. In my mind, a board should provide diverse expertise and guidance for a company, choose its CEO, and stay vigilant in making sure the chosen CEO has taken an appropriate course. Part of choosing the CEO also requires setting contract terms and compensation. And on this, I have a hard time understanding how boards in America can agree to such large compensation terms with so little downside risk for the executives involved.
It has recently come to light that in the event of a merger, Marissa Mayer, CEO of Yahoo, would receive $55 million in severance if she were ousted. Just as ridiculous is her compensation across 5 years: at minimum, it was projected to be worth $117 million across 5 years. It will likely end up being closer to $365 million, depending on the share price. Not only are these amounts ridiculous, but they are in part determined based on share price, an imperfect indicator of company health. If you happen to enter as CEO during a recession, and you stay on just as the economy and the technology sector expand, then you see the gains flow to your pay. All you had to do was nothing. This is almost precisely what happened with Yahoo: their share price increased entirely due to a large stake in Ali Baba (an investment made prior to Mayer’s tenure), which had its IPO in 2014 and currently has a market cap of nearly $200 bn.
People who defend CEO compensation in America try to draw comparisons with everyday workers and their own motivation to show up and do a good job based on the pay they receive. Money rewards good work, so their fable goes. But there is no parallel here. When most people do a poor job, they can be let go. Most don’t receive severance, and most immediately worry about how they will make ends meet, or get another job. The psychological and financial impact is often severe.
There is no similar downside for Marissa Mayer. She never has to worry about money, and she gets paid tens of millions of dollars even if she screws up and leaves. And so, I wonder: what are boards of directors thinking? This kind of thing doesn’t even seem to align with shareholder interests.
Yahoo recently laid off 1,600 people. Make the rosy assumption that Yahoo did not lose any revenue from cutting all of these workers, and that the move only cut costs. Suppose Marissa Mayer gets her severance this year of $55 million: assuming (conservatively) that employees receive a total of $200,000 in compensation on average (including health insurance and other benefits), $55 million would pay 275 workers for a year. If we consider her $365 million potential pay across 5 years, that money would pay for 365 workers for 5 years. In reality, Yahoo arguably lost some revenue from laying off these workers.
The same would not be said for the CEO. Is it at all possible to make the argument that she, or some other CEO, would have done a worse job with just $36.5 million instead of $365 million? This discussion leads easily to questions of taxing the rich. Many arguments against raising rates on the very rich seem nonsensical when put in this perspective.
There are other examples of boards of directors making poor decisions: Men’s Warehouse tried a disastrous acquisition of Joseph A. Bank and ousted its famous founder George Zimmer in the process. In this case, the board went against the CEO, and gave him no severance. Why? Men’s Warehouse’s largest shareholder was the hedgefund Eminence, which also owned a stake in Joseph A. Bank. They had pushed for a merger of sorts (and overpaid, to their simultaneous detriment and benefit). Among the members of the board of directors was Deepak Chopra, bullshit artist and new age spiritualist. What expertise could he have brought to Men’s Warehouse’s business dealings? Zimmer deserves some of the blame, as he handpicked many of the directors.
Mr. Zimmer, who lives in the Bay Area, says he feels bad for Men’s Wearhouse employees, but not for Eminence. “I don’t have a high regard for hedge funds,” he said. “Nothing personal — I’ve never met the Eminence people — but I love the idea they might lose a fortune. Hedge funds may force companies to be more efficient, but that’s not always the best thing for every stakeholder group, like employees. It’s curious we’ve allowed capitalism to become all about shareholders.”
At least in this case, you could argue that the decision was based on large stakeholder in the company. But it sucks that the employees will ultimately pay the price. Should boards be prescient rather than short-sighted? Shouldn’t they be actual experts on business matters, representing both shareholders and the many employees that work for the company? Was Deepak Chopra qualified to be a part of that decision?
Freeport is another example where a board of directors failed to do its job properly, sitting idly by (and getting rich) while letting an overcompensated CEO take the company down. The mining company decided to get into oil at the height of the commodity boom by taking on massive amounts of debt to the tune of $20 billion. The chairman, James Moffett, argued for the purchase of two companies: Plains Exploration and Production and McMoRan Exploration, where he was also the CEO. The conflicts of interest are staggering, as he stood to get rich from buying a company he had a large stake in. Where was the board to voice these concerns?
Freeport’s chief executive, Richard Adkerson, was McMoRan’s co-chairman. Nine Freeport directors owned stock in McMoRan totaling about 6 percent of the shares. Freeport agreed to buy McMoRan for $2.1 billion — a 74 percent premium over its market price before the deal was struck. Mr. Moffett himself was paid $73 million.
Moreover, Plains owned 31 percent of McMoRan, enough to block any deal. Freeport eliminated that possibility when it bought Plains. And James Flores, Plains’s chief executive, who now runs Freeport’s oil and gas operations, was also a director of McMoRan. He made $200 million on the deal.
In addition to the $73 million, after Moffett was “let go”, he received another $79.4 million in severance. The company’s market capitalization had fallen to as low as $4bn and is now $13.08B, far below its debt obligations.
Not all companies face such dramatic ends. But the questions remain: how can boards of directors do a better job for the company and the employees, and how can CEO compensation be drastically changed?
Are the important stories of the world being reported on? According to the Pew Research Center’s recent report on The State of the News Media 2013, the number of newsroom staff in the United States is at its lowest number since 1978. What’s more, the coverage that viewers and readers find is less likely to be investigative reporting. For local news, think weather, traffic and sports. For cable news, think of lots of commentary and debates on the same hot-button issues. Think of all of the foreign and domestic issues that need to be covered by good journalists, and how little of this we are actually seeing. No, many of the important stories are not being told.
I can think of no better critique of mainstream news and journalism than Nick Davies’ Flat Earth News, originally published in the United Kingdom in 2008. Davies is perhaps best known as the journalist who broke the phone-hacking scandal that rocked the United Kingdom in the summer of 2011. In addition to highlighting newsroom cuts and stories that were severely distorted or mishandled by the media, like the run-up to the invasion of Iraq, Davies writes about major global events that are simply not covered by the media. Non-stories. One of these non-stories is the massive problem of tax evasion and the use of offshore accounts. He writes:
[In 2003], bankers estimated that a third of the gross domestic product of the entire planet was being channelled through offshore accounts, and the Organisation for Economic Cooperation and Development (OECD) estimated that 60% of world trade consisted of transfers made within multinationals, passing their profits to anonymous subsidiaries in tax-free jurisdictions, while some three million corporations were avoiding tax simply because they had no identifiable owner. (emphasis mine).
Since the book was published in 2008, however, a dramatic change has taken place in the coverage of tax avoidance. This week may have been particularly important and dramatic in marking these ongoing changes. The International Consortium of Investigative Journalists (ICIJ) have announced what is “the largest cross border journalism collaboration in history.”
The initial results of this investigation of 200gb of files have been stunning. Part of the process will be naming and shaming people who take advantage of tax havens. The Guardian, in cooperation with the ICIJ, identifies several:
In France, Jean-Jacques Augier, President François Hollande’s campaign co-treasurer and close friend, has been forced to publicly identify his Chinese business partner. It emerges as Hollande is mired in financial scandal because his former budget minister concealed a Swiss bank account for 20 years and repeatedly lied about it.
In Mongolia, the country’s former finance minister and deputy speaker of its parliament says he may have to resign from politics as a result of this investigation.
Five or six years ago, we weren’t talking about tax evasion so much. Now, we’re talking about it daily and in the context of a broader discussion about tax policy as well as social and economic injustice, and it is worth pointing out what has happened and why.
In 2008, the IRS dealt a major blow to U.S. tax evaders due to its revamped whistle-blower program, having received a UBS client list of Americans who parked their money in Switzerland and illegally avoided taxes. The worldwide financial crisis that followed made a fact plainly visible to everyone: the rich and the powerful play by a different set of rules. Many countries were forced to implement heavy cuts to basic services, safety nets and public sector employment. This seemed kind of incredible, as the economics problems were caused by large-scale political and financial malfeasance, while everyone else paid the price. Why should that be? A timid thought began to creep up. Shouldn’t the rich pay more?
And it is impossible to talk about tax policy and getting the rich to pay more without also having a serious look at tax avoidance. Interest in tax avoidance initially centered around Greece, where the problem was widespread. We looked to Greece and saw a completely dysfunctional system where no one paid what they owed, and no one had faith that their neighbor would pay. And somehow, they were about to take down the entire Eurozone.
But the conversation didn’t end there. For instance, in Britain, Gordon Brown’s government instituted a 50 percent top tax rate. This seemed reasonable to do. What was the reaction? Countless stories of high profile (but anonymous, of course) British citizens threatening to go elsewhere to avoid paying higher taxes. This was a legal and low-tech threat of tax avoidance, but it highlighted a deep schism in society that had arisen out of three decades of rising inequality in virtually every developed country. The subjects of these articles just couldn’t understand. Of course, these turned out to be empty threats. The same thing has happened in France (only one confirmed departure, by the way).
From an American perspective, there is one and only one person who was able to elevate tax havens and offshore accounts to a topic of national discourse. Mitt Romney. Despite massive budget deficits, high unemployment and slow growth, large corporations and rich individuals were doing fine and paying very little in taxes. It was in this context that the 2012 Presidential Campaign took place.
Enter Mitt Romney, who supposedly had a net worth in the hundreds of millions of dollars. And then came his (lack of) tax returns, releasing only his 2010 returns, which turned out to be incomplete. Even in its incomplete form, the hundreds of pages show Swiss bank accounts, partnerships in the Cayman Islands, and blind trusts. The blind trusts turned out to be elaborate (but legal) schemes at tax avoidance, as reported by Bloomberg. And remember the IRS whistle-blower case that involved Americans with Swiss bank accounts? The IRS instituted an amnesty program soon after, where people with accounts in UBS could come forward, pay a fine, and retain anonymity. There’s speculation about whether Romney was one of these individuals. Throughout the presidential campaign, Romney’s taxes and tax fairness remained an issue, and probably played some role in his losing the election.
Romney is no longer in the picture, but this issue is not going anywhere. Just this past month, Cyprus’s role as an offshore tax haven to Russian oligarchs played prominently into bailout talks. With talks of huge losses being imposed on foreign depositors, this entire offshore banking system that makes up much of the economy in Cyprus is likely gone for good.
It is good to see multiple newspapers and the ICIJ devote considerable efforts in the fight against tax avoidance, tax havens and secrecy that allow the rich and the powerful to unfairly maintain their status at the expensive of everyone else.
I could spend a great many posts focusing on the immense hypocrisy of the present Republican Party platform as it relates to budgets, taxation and entitlements.
Identifying flip-flops and hypocrisy is important as it can tell us something about the true motivations of our elected representatives.
I will ignore all of this, however, and simply try to point out the awfulness of their current position.
What is the current Republican position? Let’s lay it out.
1. We have major debt problem, we have to do something about it right now.
2. We will not raise tax rates on the top 2%.
3. We will not extend tax cuts solely for the middle class. Present tax rates for the top 2% must also be included.
4. We will only raise revenue by limiting or eliminating tax deductions we shall not name.
5. We will not identify tax deductions, but we will not touch the preferential tax treatment of capital gains and the carried interest loophole.
6. We should cut entitlements, like Social Security and Medicare. Probably by raising the age of eligibility for both programs. Though we have not come out and said what we should cut in entitlements. But we insist we should cut entitlements.
7. We do not support the extension of unemployment benefits, or, if we did it would be a major concession in any deal.
8. We will not raise the debt ceiling until we can agree on something.
9. Obamacare should be on the table too. We don’t like it.
I will try to respond to each of these.
1. We have a long-term debt problem that must eventually be dealt with. We do not have to deal with it now. Interest rates on Treasuries are at historically low levels. If you have faith in the market, then you must admit that the market is not at all worried about our debt. In contrast, we have a jobs crisis. As seen by the still-elevated unemployment rate.
2 and 3. Those at the top of the income distribution are paying historically low effective tax rates. They are also performing extremely well relative to the rest of the population. They are the class of people who have fully recovered from the great recession. Asking these individuals to pay the same tax rate on income over $200,000/$250,000 as they paid in the 1990s is not socialist or the end of the world. According to the CBO, allowing the lower tax rates to expire for higher-income would generate $824 billion. This is not an insignificant amount of revenue.
3. This is foolish and needs no comment, but I will say that the President campaigned on this issue in 2008 and 2012 and won both times, as did a Democratic senate. Democrats won more votes in the House than Republicans did, but you know, gerrymandering and redistricting of congressional districts.
4. I will quote the Center for Budget and Policy Priorities:
To even come close to replacing the revenues from letting the high-end tax cuts expire with a cap on itemized deductions that targets high-income taxpayers and does not affect middle-class families, policymakers would have to virtually eliminate all itemized deductions for households with incomes over $250,000. Moreover, to avoid a massive increase in effective tax rates, policymakers would have to phase the cap in over an extended income range above the $250,000 level, reducing the revenue it would generate.
5. Preferential treatment of capital gains primarily benefits high-income individuals. See Warren Buffet’s tax returns. Also, Mitt Romney’s tax returns in 2010 and 2011.
6. Social Security is not in crisis. Medicare will eventually be quite costly for the government. However, for all of their demands for entitlement cuts, most Americans don’t want to see cuts. Also see my response to point 3. Also see Salon.
7. The current problem is a lack of jobs and not the amount of debt, so this seems like a strange reordering of priorities that would have a detrimental effect on the economy.
8. This could have a negative effect on the economy.
9. Obamacare passed Congress in 2010. Obamacare largely survived the Supreme Court’s scrutiny in 2012. Obama won re-election in 2012. For some reason all I can think of is Dumb and Dumber. Only the question asked is “what are the chances we can repeal Obamacare?”
Taken together, we have a series of awful positions that, if they came to pass, would negatively affect the low and middle-income individuals and families in this country. It would hurt, not help the present jobs situation. It would push our society to one of even greater inequality. It would disadvantage the most vulnerable. It would help the most fortunate. This seems like a strange platform to run on in 2012.
The Great Recession has been miserable for many reasons (and it does not look to be over), but it has also reminded us that major world events can help us see politicians, elites and institutions for what they really are. Conventional wisdom and the Very Serious People (a term coined by Paul Krugman) who crowd and speak the loudest on talk shows, newspapers and the airwaves have had a terrible track record over the last several years. The last month or so has been especially illustrative.
Here is the Review & Outlook section of the Wall Street Journal from May 29, 2009, a little over 3 years ago:
They’re back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession.
Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November. Treasury yields had stayed low, and the dollar had remained strong, as long as investors were looking for the safest financial port amid the post-September panic. But as risk aversion subsides, and investors return to corporate bonds and other assets, investors are now calculating the risks of renewed dollar inflation.
This past week, the U.S. Government could issue 10-Year Treasuries while offering around 1.5 per cent a year. If you think inflation will be around 2 per cent for the foreseeable future, which is very low, they federal government can essentially borrow for free or at a negative interest rate. Here is the graph that plots yields from 2009 to the most recent data point available from FRED (May 31, 2012) although on June 1, it fell even more (hitting close to 1.4 at one point).
So much for inflation and investors shifting out of safe assets. These are still topics that periodically make appearances on the Wall Street Journal’s editorial page whenever it suits their interests. It’s not out of good intentions that they continue to misread the situation in the economy. Whether they are simply wrong every time on accident or if they are simply advocating whatever policies would accomplish their agenda and willfully lying is irrelevant in some sense, though I think it’s clear they fall into the latter category. And it’s reason enough for people to stop reading them and listening to them as enlightened voices on the economy.
I bring this up because on editorial pages and television, the focus has consistently been on debt. For a while, people tried to advocate for immediate debt reduction by arguing it would also help the broader economy and job growth. The austerity argument has proven a tremendous failure everywhere it has been attempted, from the United Kingdom to Ireland to even the United States to the extent that local and state governments have cut back significantly. Finally, over 3 years after the financial crisis started, it seems like people may be getting the right idea. Francois Hollande was elected in France, and he has openly called for less austerity and more growth-oriented policies.
The above WSJ piece I quoted from also said the following:
It’s not going too far to say we are watching a showdown between Fed Chairman Ben Bernanke and bond investors, otherwise known as the financial markets. When in doubt, bet on the markets.
Here is a recent story from the pages of the Financial Times about what major players in the financial markets are saying, not that they have been so great at understanding the economy over the past several years:
Some of the world’s biggest investors have indicated they would back heavier spending to encourage growth by governments with very low borrowing costs, warning that austerity alone will not restore their budgets to health.
All of this leads up to the last several jobs reports. March, April and May all had data that came in well below expectations. Even meeting expectations would have basically been sub-par given the enormity of the jobs crisis. Again, people took early victory laps and used the opportunity not to talk about how to further reduce mass joblessness, but instead how to reduce the debt, even as the government could borrow at record-low rates. Cutting spending in a depressed economy shouldn’t have made sense just because of a few good data releases, but for the Very Serious People, it was another opportunity to shift the conversation towards something that was more up their alley.
I had previously expressed significant skepticism about the momentum in the economy everyone else was taking for granted as self-sustaining. I wrote, “it’s not yet clear to me that it is fully self-sustaining. This will be a difficult year with Europe now in a “mild” recession, China growing at a slower rate, and oil prices at very high levels. I would need to see two to three more months of solid employment numbers before feeling “good” about the recovery.” I wrote this after February’s data was released in early March. The following shows the payroll data for 2012 so far. Data for May was released 2 days ago, and it is by far the most depressing indication of the awful state of affairs we are in.
Previously, Justin Wolfers, being a little facetious, had said that the strongest part of the US Economy was the Revision Sector. His comment was making light of the fact that for the first several months of the year, revisions to previous months’ data tended to systematically go up rather than move randomly.
The revision sector has officially faltered. The following table shows original data points as well as each successive revision for January through May.
The most recent jobs report revised April’s data down from 115 to 77 thousand jobs added. March was revised down from 154 to 143 thousand jobs. May came in at 69 thousand jobs added from the previous month. We are in a deep hole.
All of this makes me depressed about many things. Those who have been consistently wrong continue to enjoy an air of confidence and attention from the media. Without people like Paul Krugman, it seems to me that advocacy for the right kind of policies would be barely heard at all. And with each weak jobs report, it looks even more likely that the Republicans will at the very least take the Presidency in November. Even before we reach that point, it may be the case that we have another debt ceiling debacle which may paralyze the recovery even further. And into next year, as Republicans try to implement their plans to slash spending on unemployment benefits, Medicaid, Medicare, and SNAP, the U.S. economy may enter another recession even as it has barely begun to recover from its last one, only with an even weaker safety net than before. But maybe at the end of the day, they can pat themselves on the back and be glad that debt will have decreased, even as the livelihoods and futures of millions of people are destroyed. If this assessment sounds overly harsh and pessimistic, you need only look to the current political and economic realities to find its justification.
According to the BLS, employers added 227,000 jobs in February. This was slightly above market expectations, and was slightly higher than the ADP number released on Wednesday. Both December and January were revised upwards, to 223,000 and 284,000, respectively. There’s lots of interesting information in the jobs report that’s not fully captured by the headline numbers, so let’s dive in.
First thing’s first: Was it a good jobs report? It was . . . OKAY. I suspect we have gotten used to really piss-poor numbers and false-starts (a product of the worst recession since the 1930s). Brad DeLong pretty much summarizes the entire jobs report in the subject line of his blog post: “IN A NORMAL RECOVERY, THIS WOULD BE A DISAPPOINTING PAYROLL REPORT. BUT IN THIS RECOVERY THIS IS VERY NICE TO SEE.”
The Bad News:
There are still 12.8 million unemployed persons, and 8.1 million workers who are part-time for economic reasons. There are 1 million discouraged workers not currently in the labor force. Add these numbers together and consider what 227,000 jobs in a month actually means. We have to do more.
The OK News:
The prime-age employment-population ratio (chart above), after several months of increase, did not change from January to February. The headline unemployment rate did not fall or rise. More on that below.
The Good News:
1. Job growth has been consistently over 200,000 since December.
2. Something to note is that even if the headline unemployment rate does not fall, we could still have a good month. The unemployment rate is just one measure of the health of the labor market, but lowering the rate is not a goal unto itself. As the labor market recovers, people who had exited the labor force due to the dearth of jobs will likely start looking for work again, thus putting upward pressure on the unemployment rate even as the number of jobs created puts downward pressure. In this sense, having job creation but an unemployment rate that’s not falling could actually be a good thing at this point in the recovery, as it signals people feel confident enough to start looking for work again. The labor force participation rate increased slightly this month. Ezra Klein has more on this.
To bring this point home, if we consider the broadest of unemployment rates (commonly called the U6 rate), which includes workers who are part-time for economic reasons as well as those who are marginally attached to the labor forced (discouraged workers), we have a rate that is falling very quickly. The following chart plots the headline unemployment rate (right axis, red line) and the U-6 rate (left axis, blue line):
All in all, this was a decent jobs report, and the last three months taken together have been good. But it’s not enough, and it’s not yet clear to me that it is fully self-sustaining. This will be a difficult year with Europe now in a “mild” recession, China growing at a slower rate, and oil prices at very high levels. I would need to see two to three more months of solid employment numbers before feeling “good” about the recovery. Rather than simply hoping things get better, the federal government could be doing much to improve the situation. Congress could act now. But it doesn’t look like that will happen this year.