Paul Krugman continues to delve into the depths of sustained secular stagnation asking about the possibility of a prolonged period where the economy does not self-correct to full employment. In the process he takes a sidestep to tell readers that this is not the secular stagnation story of Bill Greider from the 1990s. This one is worth a moment’s thought. (Just to be clear, I consider both Krugman and Greider friends, so I don’t have a particular ax to grind in this story.)
Greider hit on a number of themes in this book, but at least part of the story was one of the U.S. trade deficit creating a deficiency in aggregate demand. In properly behaved macro models, trade deficits are supposed to be self-correcting as the value of the deficit nation’s currency falls and the values of the surplus nations’ currencies rise. This makes imports more expensive to the deficit nation and their exports cheaper to people living in other countries. This leads to fewer imports and more exports and therefore more balanced trade.
But this adjustment has not happened, or certainly has not happened quickly. We can blame evil doers at central banks in other countries who are manipulating their currencies or frightened foreigner investors who think dollar denominated assets are the only safe place to store their wealth. The actual cause does not matter, the point is that the dollar has not fallen to correct the imbalance.
As a result, the trade deficit continued to expand through the late 1990s and into the last decade, eventually peaking at almost 6.0 percent of GDP in 2005. It has fallen back somewhat due to the drop in the value of the dollar, decreased energy imports, and the continuing weakness of the economy reducing the demand for imports. However it is still close to 3.0 percent of GDP. Applying a multiplier of 1.5 this implies a loss of demand equal to 4.5 percent of GDP, or close to $700 billion a year in today’s economy.
It is worth comparing the size of this demand loss with the amount that can be plausibly attributed to productivity and labor force growth slowdown in Krugman’s secular stagnation story. In that story, we are seeing lower investment than if productivity and labor force growth had continued on their prior track. But how large could that effect plausibly be? Would investment be three percentage points higher as a share of GDP if productivity and the labor force had continued on their prior pace? That would put the investment share above the peak it hit during the dot.com bubble and the Y2K scare. That doesn’t seem like a very plausible counter-factual.
In other words, it seems that the trade deficit has to be pretty central in any serious story of long-term secular stagnation, at least as applies to the United States. It has been and is a very big deal.
(As an aside, Krugman asks if we can deal with sustained secular stagnation by running ever larger government deficits. If we are destined to be forever below potential GDP, it’s hard to see why not. Aftar all, it’s not as though there is any reason to believe that printing the money to finance the deficits would create inflation.)
Paul Krugman continues to delve into the depths of sustained secular stagnation asking about the possibility of a prolonged period where the economy does not self-correct to full employment. In the process he takes a sidestep to tell readers that this is not the secular stagnation story of Bill Greider from the 1990s. This one is worth a moment’s thought. (Just to be clear, I consider both Krugman and Greider friends, so I don’t have a particular ax to grind in this story.)
Greider hit on a number of themes in this book, but at least part of the story was one of the U.S. trade deficit creating a deficiency in aggregate demand. In properly behaved macro models, trade deficits are supposed to be self-correcting as the value of the deficit nation’s currency falls and the values of the surplus nations’ currencies rise. This makes imports more expensive to the deficit nation and their exports cheaper to people living in other countries. This leads to fewer imports and more exports and therefore more balanced trade.
But this adjustment has not happened, or certainly has not happened quickly. We can blame evil doers at central banks in other countries who are manipulating their currencies or frightened foreigner investors who think dollar denominated assets are the only safe place to store their wealth. The actual cause does not matter, the point is that the dollar has not fallen to correct the imbalance.
As a result, the trade deficit continued to expand through the late 1990s and into the last decade, eventually peaking at almost 6.0 percent of GDP in 2005. It has fallen back somewhat due to the drop in the value of the dollar, decreased energy imports, and the continuing weakness of the economy reducing the demand for imports. However it is still close to 3.0 percent of GDP. Applying a multiplier of 1.5 this implies a loss of demand equal to 4.5 percent of GDP, or close to $700 billion a year in today’s economy.
It is worth comparing the size of this demand loss with the amount that can be plausibly attributed to productivity and labor force growth slowdown in Krugman’s secular stagnation story. In that story, we are seeing lower investment than if productivity and labor force growth had continued on their prior track. But how large could that effect plausibly be? Would investment be three percentage points higher as a share of GDP if productivity and the labor force had continued on their prior pace? That would put the investment share above the peak it hit during the dot.com bubble and the Y2K scare. That doesn’t seem like a very plausible counter-factual.
In other words, it seems that the trade deficit has to be pretty central in any serious story of long-term secular stagnation, at least as applies to the United States. It has been and is a very big deal.
(As an aside, Krugman asks if we can deal with sustained secular stagnation by running ever larger government deficits. If we are destined to be forever below potential GDP, it’s hard to see why not. Aftar all, it’s not as though there is any reason to believe that printing the money to finance the deficits would create inflation.)
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Paul Solman seems determined to make me an optimist on the state of the economy, at least by comparison. Following the comments of Kristin Butcher, chair of Wellesley’s economic department, his blogpost on the March jobs report dismisses the 192,000 job growth reported for March:
“That’s because, according to the survey of 60,000 households, roughly 170,000 more Americans of working age were added to the population in March, consistent with the number we add just about every month, and also consistent with the Census Bureau’s report that the U.S. population is growing at slightly more than 2 million people a year.But that would mean that the number of jobs added — 192,000 — just kept pace with the number of new people who needed them.”
This comment misses the fact that not everyone works. The employment to population ratio (EPOP) is just below 60 percent. This means that for the EPOP to stay constant we need roughly 100,000 new jobs a month. In this context, the March numbers implied that we reduced the number of unemployed by roughly 90,000.
The other item on which I am more optimistic than Solman is part-time employment. He emphasized the rise in involuntary part-time as bad news. I looked to the rise in voluntary part-time as good news. While the number of people working part-time involuntarily did rise in March, it is still 240,000 (@ 3.0 percent) below the year ago level, and is fact well below the level for any month in 2013. These numbers are erratic and the March rise partly reverses a drop of 580,000 reported between December and February. In other words, there is no evidence in this series that the Affordable Care Act (ACA) is increasing the number of people involuntarily working part-time as the post suggests.
On the other hand, the number of people who are voluntarily working part-time increased by 230,000 in March and is 515,000 above its year ago level. One possible effect of the ACA would be to give workers the option to work part-time who previously may have had to work full-time to get health care insurance. Since workers can now get insurance through their exchanges rather than their jobs, many may choose to work fewer hours to spend more time with their families or doing other things. This is especially likely for parents of young children.
In short, the data to date would support the view that Obamacare is having a positive effect on the labor market by giving workers more choices. But we will need many more months of data before we can say this with any confidence.
Paul Solman seems determined to make me an optimist on the state of the economy, at least by comparison. Following the comments of Kristin Butcher, chair of Wellesley’s economic department, his blogpost on the March jobs report dismisses the 192,000 job growth reported for March:
“That’s because, according to the survey of 60,000 households, roughly 170,000 more Americans of working age were added to the population in March, consistent with the number we add just about every month, and also consistent with the Census Bureau’s report that the U.S. population is growing at slightly more than 2 million people a year.But that would mean that the number of jobs added — 192,000 — just kept pace with the number of new people who needed them.”
This comment misses the fact that not everyone works. The employment to population ratio (EPOP) is just below 60 percent. This means that for the EPOP to stay constant we need roughly 100,000 new jobs a month. In this context, the March numbers implied that we reduced the number of unemployed by roughly 90,000.
The other item on which I am more optimistic than Solman is part-time employment. He emphasized the rise in involuntary part-time as bad news. I looked to the rise in voluntary part-time as good news. While the number of people working part-time involuntarily did rise in March, it is still 240,000 (@ 3.0 percent) below the year ago level, and is fact well below the level for any month in 2013. These numbers are erratic and the March rise partly reverses a drop of 580,000 reported between December and February. In other words, there is no evidence in this series that the Affordable Care Act (ACA) is increasing the number of people involuntarily working part-time as the post suggests.
On the other hand, the number of people who are voluntarily working part-time increased by 230,000 in March and is 515,000 above its year ago level. One possible effect of the ACA would be to give workers the option to work part-time who previously may have had to work full-time to get health care insurance. Since workers can now get insurance through their exchanges rather than their jobs, many may choose to work fewer hours to spend more time with their families or doing other things. This is especially likely for parents of young children.
In short, the data to date would support the view that Obamacare is having a positive effect on the labor market by giving workers more choices. But we will need many more months of data before we can say this with any confidence.
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In his Washington Post column Michael Gerson told readers that health care costs increased at the fastest rate in 10 years in the last quarter of 2013. His source lists the growth rate of expenditures (not costs) at 5.6 percent in the quarter. This follows very slow growth in the prior three quarters. By comparison, health care spending grew by 6.7 percent over the whole year in 2007. There may well have been quarters more recently in which the growth rate exceeded 5.7 percent (the quarterly data are erratic), but clearly the claim that the fourth quarter growth rate was a ten-year high is obviously not true.
In his Washington Post column Michael Gerson told readers that health care costs increased at the fastest rate in 10 years in the last quarter of 2013. His source lists the growth rate of expenditures (not costs) at 5.6 percent in the quarter. This follows very slow growth in the prior three quarters. By comparison, health care spending grew by 6.7 percent over the whole year in 2007. There may well have been quarters more recently in which the growth rate exceeded 5.7 percent (the quarterly data are erratic), but clearly the claim that the fourth quarter growth rate was a ten-year high is obviously not true.
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The NYT had a piece on efforts to address inequality at the local level which might have left readers with the impression that there is little that cities can do. The only economist quoted in the piece was Edward Glaeser, who was very dismissive of the idea that cities could do anything that would have much impact.
It would have been useful to include the views of University of Massachusetts economist Arin Dube or Berkeley economist Michael Reich, both of whom have done extensive work on state and local minimum wages. Reich recently co-authored a book on the impact of local measures in helping low-income workers.
The NYT had a piece on efforts to address inequality at the local level which might have left readers with the impression that there is little that cities can do. The only economist quoted in the piece was Edward Glaeser, who was very dismissive of the idea that cities could do anything that would have much impact.
It would have been useful to include the views of University of Massachusetts economist Arin Dube or Berkeley economist Michael Reich, both of whom have done extensive work on state and local minimum wages. Reich recently co-authored a book on the impact of local measures in helping low-income workers.
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Brad DeLong picks up on Paul Krugman’s column and questions whether the top one percent of the income distribution (or top 0.01 percent) really have much to fear from higher inflation. Brad concludes that they don’t, but that they think they do. He says:
“The top 0.01% were impoverished by the 1970s as a whole. But they have not been enriched by the post 2008 era. What they have gained via a higher capitalization via low safe interest rates has been offset by what they have lost as a result of depressed profits, depressed by a low level of economic activity, a depression which has not been completely offset by downward pressure on wages. The top 0.01% would not be poorer absolutely (although they would be poorer relatively) in a high-pressure higher-inflation economy.”
“But they think they would be…”
I’m not sure about Brad’s story here. While weak GDP growth has undoubtedly depressed profits, this has been largely offset by a large increase in profit shares. If I were a 0.01 percenter, I would certainly not be confident that a return to something resembling full employment would not depress profits. In other words, a loss in profit share due to higher wage pressures could certainly offset the gains due to increased output. Also, from the standpoint of the rich, why risk it?
The other factor that could carry much weight in the minds of the super-rich is the impact of inflation on the stock market. Brad notes the plunge in stock valuations in the 1970s as one of the items that reduced the wealth of the rich:
“a steep fall in stock market equities even though the value of corporate debt owed falls, as investors become much more pessimistic and value earnings at a much lower multiple–in part because of the productivity growth slowdown, in part because of confusion between nominal and real discount rates, and for other reasons.”
It is remarkable that more than three decades later we don’t have a widely accepted explanation for the extraordinarily low price to earnings ratios of the 1970s. The view that investors were confused and wrongly discounted earnings using nominal interest rates rather than real interest rates is one common explanation.
However, if this was true in the 1970s do we have good reason to believe that it would not be true today? After all, these are the same folks that could not see an $8 trillion housing bubble in the last decade and a $10 trillion stock bubble in the prior decade. When do we think the big investors stopped being wrong on fundamental economic issues?
Brad DeLong picks up on Paul Krugman’s column and questions whether the top one percent of the income distribution (or top 0.01 percent) really have much to fear from higher inflation. Brad concludes that they don’t, but that they think they do. He says:
“The top 0.01% were impoverished by the 1970s as a whole. But they have not been enriched by the post 2008 era. What they have gained via a higher capitalization via low safe interest rates has been offset by what they have lost as a result of depressed profits, depressed by a low level of economic activity, a depression which has not been completely offset by downward pressure on wages. The top 0.01% would not be poorer absolutely (although they would be poorer relatively) in a high-pressure higher-inflation economy.”
“But they think they would be…”
I’m not sure about Brad’s story here. While weak GDP growth has undoubtedly depressed profits, this has been largely offset by a large increase in profit shares. If I were a 0.01 percenter, I would certainly not be confident that a return to something resembling full employment would not depress profits. In other words, a loss in profit share due to higher wage pressures could certainly offset the gains due to increased output. Also, from the standpoint of the rich, why risk it?
The other factor that could carry much weight in the minds of the super-rich is the impact of inflation on the stock market. Brad notes the plunge in stock valuations in the 1970s as one of the items that reduced the wealth of the rich:
“a steep fall in stock market equities even though the value of corporate debt owed falls, as investors become much more pessimistic and value earnings at a much lower multiple–in part because of the productivity growth slowdown, in part because of confusion between nominal and real discount rates, and for other reasons.”
It is remarkable that more than three decades later we don’t have a widely accepted explanation for the extraordinarily low price to earnings ratios of the 1970s. The view that investors were confused and wrongly discounted earnings using nominal interest rates rather than real interest rates is one common explanation.
However, if this was true in the 1970s do we have good reason to believe that it would not be true today? After all, these are the same folks that could not see an $8 trillion housing bubble in the last decade and a $10 trillion stock bubble in the prior decade. When do we think the big investors stopped being wrong on fundamental economic issues?
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Tyler Cowen warns us that technology may be making it much harder for less educated workers to get jobs. He highlights a series of changes in the economy then tells readers:
“All of these developments mean a disadvantage for people who don’t like formal education, even if they are otherwise very talented. It’s no surprise that current unemployment has been concentrated among those with lower education levels.”
Actually, the data show unemployment has been less concentrated among the less educated in this recovery than was the case twenty years ago. Over the first three months of 2014 the unemployment rate for people over age 25 with at least a college degree averaged 3.3 percent. This is slightly higher than the 3.1 percent average in the first quarter of 1992.
While the unemployment rate for college grads was higher in the most recent period than in 1992, it was lower for both people with just high school degrees and for people who did not graduate high school. For high school grads the unemployment rate averaged 6.4 percent in the most recent quarter, half a percentage point below the 6.9 percent average in the first quarter of 1992. For those without high school degrees the unemployment rate was 9.7 percent in the first quarter of 2014 more than a percentage point lower than the 11.0 percent average in the first quarter of 1992.
There are other measures that may support Cowen’s case, but a simple comparison of unemployment rates by education levels shows the opposite.
Note: Typos corrected.
Tyler Cowen warns us that technology may be making it much harder for less educated workers to get jobs. He highlights a series of changes in the economy then tells readers:
“All of these developments mean a disadvantage for people who don’t like formal education, even if they are otherwise very talented. It’s no surprise that current unemployment has been concentrated among those with lower education levels.”
Actually, the data show unemployment has been less concentrated among the less educated in this recovery than was the case twenty years ago. Over the first three months of 2014 the unemployment rate for people over age 25 with at least a college degree averaged 3.3 percent. This is slightly higher than the 3.1 percent average in the first quarter of 1992.
While the unemployment rate for college grads was higher in the most recent period than in 1992, it was lower for both people with just high school degrees and for people who did not graduate high school. For high school grads the unemployment rate averaged 6.4 percent in the most recent quarter, half a percentage point below the 6.9 percent average in the first quarter of 1992. For those without high school degrees the unemployment rate was 9.7 percent in the first quarter of 2014 more than a percentage point lower than the 11.0 percent average in the first quarter of 1992.
There are other measures that may support Cowen’s case, but a simple comparison of unemployment rates by education levels shows the opposite.
Note: Typos corrected.
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It’s hard to believe that patent protection was not mentioned in this useful NYT piece on the high cost of treating chronic diseases like diabetes. The prices of new drugs and devices are high because the government grants companies patent monopolies. It will arrest and imprison potential competitors.
As every intro econ textbook shows, the monopoly profits also provide enormous incentives for corruption. As a result companies routinely misrepresent the safety and effectiveness of their products and lobby politicians to get the government to pay for their products. We would be debating alternative mechanisms for financing drug research if the industry were not so powerful and the economic profession so corrupt.
Addendum:
Sorry folks, I should have been clearer. I meant that the issue of patent-supported research was never raised. There are some folks, like Joe Stiglitz, who is a Nobel prize winning economist, who have suggested alternatives to patent protection as a way to finance research into prescription drugs or medical equipment. So the idea that alternatives exist should not be viewed as crazy-talk. And, if you don’t bring up alternative to patent-supported research in an article like this one — which is a careful and thoughtful piece — where is the issue going to be raised?
It’s hard to believe that patent protection was not mentioned in this useful NYT piece on the high cost of treating chronic diseases like diabetes. The prices of new drugs and devices are high because the government grants companies patent monopolies. It will arrest and imprison potential competitors.
As every intro econ textbook shows, the monopoly profits also provide enormous incentives for corruption. As a result companies routinely misrepresent the safety and effectiveness of their products and lobby politicians to get the government to pay for their products. We would be debating alternative mechanisms for financing drug research if the industry were not so powerful and the economic profession so corrupt.
Addendum:
Sorry folks, I should have been clearer. I meant that the issue of patent-supported research was never raised. There are some folks, like Joe Stiglitz, who is a Nobel prize winning economist, who have suggested alternatives to patent protection as a way to finance research into prescription drugs or medical equipment. So the idea that alternatives exist should not be viewed as crazy-talk. And, if you don’t bring up alternative to patent-supported research in an article like this one — which is a careful and thoughtful piece — where is the issue going to be raised?
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Glenn Hubbard, the dean of Columbia Business School and former chief economist to President George W. Bush, argued that we have a shortage of workers in a Wall Street Journal column. Hubbard noted the sharp fall in labor force participation since the downturn. He attributed it to a lack of incentive for people to work. This is in striking contrast to the more obvious logic, that when people have been trying unsuccessfully to find jobs for 6 months or a year, they eventually give up. (This explanation seems especially plausible since we know that employers generally will not even consider hiring a person who has been unemployed for a long period of time.)
The problem with Hubbard’s story is that he doesn’t have a good explanation for why people suddenly decided that they didn’t want to work. He points to an increase in the length of unemployment benefits, but this happens in every downturn. Furthermore, the maximum duration of benefits has been cut back sharply from its peak of 99 weeks in the first years of the recession with no corresponding surge in employment.
The Affordable Care Act will make it possible for many people to get health care insurance without working or without working full time, but that should only have begun affecting the data in the last few months as the health care exchanges came into existence. It would not explain the drop in labor force participation that was already quite evident by the summer of last year.
If the problem is really on the supply side then we should be seeing a surge in vacancies. In fact, the vacancy rate is still more than 10 percent below the pre-recession level and more than 20 percent below the 2000 level. We should also see an increase in the length of the average workweek. While this is more or less back to its pre-recession level (slightly above in manufacturing), it certainly is not unusually high. And we should be seeing rapid wage growth as firms compete for workers. Wages are now just moderately outpacing inflation.
In short, we have no reason to believe that the problem with the labor force is on the supply side. There remains an incredibly simple story that the housing bubble that was driving demand collapsed. With no source of demand to replace the housing and consumption driven by the bubble we are destined to slog through a prolonged period of slow growth and high unemployment. That one seems straightforward but it is apparently too simple for economists to understand.
Glenn Hubbard, the dean of Columbia Business School and former chief economist to President George W. Bush, argued that we have a shortage of workers in a Wall Street Journal column. Hubbard noted the sharp fall in labor force participation since the downturn. He attributed it to a lack of incentive for people to work. This is in striking contrast to the more obvious logic, that when people have been trying unsuccessfully to find jobs for 6 months or a year, they eventually give up. (This explanation seems especially plausible since we know that employers generally will not even consider hiring a person who has been unemployed for a long period of time.)
The problem with Hubbard’s story is that he doesn’t have a good explanation for why people suddenly decided that they didn’t want to work. He points to an increase in the length of unemployment benefits, but this happens in every downturn. Furthermore, the maximum duration of benefits has been cut back sharply from its peak of 99 weeks in the first years of the recession with no corresponding surge in employment.
The Affordable Care Act will make it possible for many people to get health care insurance without working or without working full time, but that should only have begun affecting the data in the last few months as the health care exchanges came into existence. It would not explain the drop in labor force participation that was already quite evident by the summer of last year.
If the problem is really on the supply side then we should be seeing a surge in vacancies. In fact, the vacancy rate is still more than 10 percent below the pre-recession level and more than 20 percent below the 2000 level. We should also see an increase in the length of the average workweek. While this is more or less back to its pre-recession level (slightly above in manufacturing), it certainly is not unusually high. And we should be seeing rapid wage growth as firms compete for workers. Wages are now just moderately outpacing inflation.
In short, we have no reason to believe that the problem with the labor force is on the supply side. There remains an incredibly simple story that the housing bubble that was driving demand collapsed. With no source of demand to replace the housing and consumption driven by the bubble we are destined to slog through a prolonged period of slow growth and high unemployment. That one seems straightforward but it is apparently too simple for economists to understand.
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