A different take on labor force shrinkage

Just ran across a couple of references to Chicago economist Casey Mulligan's new book on the Great Recession: The Redistribution Recession.  In light of yesterday's post, I feel obligated to post on Mulligan's explanation of why the labor force has shrunk so much.  Mulligan puts much of the blame on the stimulus package itself for eroding the incentives to work.  Expansions in the availability of unemployment benefits, housing assistance and food stamps explain as much as half of the decline in employment and hours, Mulligan argues, by eroding the payoff from working.

Here is an example from a Forbes piece by John Goodman I saw yesterday: 

Mulligan gives the example of a two earner couple — each earning $600 a week. After the wife gets laid off she obtains a new job offer, paying $500 a week. But after deducting taxes and work related expenses her take home pay would be $257. Since untaxed unemployment benefits total $289, clearly she is better off not working.

I have not had the chance to read Mulligan's book, so it is hard for me to evaluate his analysis and compare it to Robert Moffitt's work that I cited in yesterday's post.  WSJ reviewer Stephen Moore puts Mulligan's work in perspective by saying

By the way, Mr. Mulligan doesn't challenge the claim that a surge in unemployment benefits, food stamps and other subsidies may have been desirable to prevent hunger or severe poverty for out-of-luck families or unemployable people traumatized by the recession. He simply and inconveniently notes that, though increasing subsidies may be compassionate in the short term, it comes with costs in the long term that eventually cause more hardship rather than less. 

NYT columnist takes field trip to NC

Joe Nocera has a NYT piece today about his factory field trip to Charlotte and Winston-Salem to visit new plants built by Siemens and Caterpillar.  The most interesting takeaway is that these two companies decided to build in NC instead of China because (1) NC technical colleges do a great job partnering with industry to provide training; (2) for skilled labor, the cost differential between the two countries is not all that large; and (3) shipping costs for the types of products Caterpillar makes play an important role in plant location decisions. 

Is there a manufacturing renaissance on the horizon?  The good news is that construction of new plants has picked up.  The less good news is that the new plants are very capital-intensive and generate modest numbers of new jobs: 800 in Charlotte and 500 in Winston-Salem.  Cat is getting $14m in state and local incentives for those 500 jobs, a tidy $28k per job -- a much better bang per buck than the President's jobs bill, as I noted recently on this blog. 

More on the jobs bill

My post on simple jobs bill arithmetic generated all time highs in visits and comments for this blog (thanks to Greg Mankiw for the link).  The post, which suggested that we take the proposed $447b jobs package and spend it directly on job creation for unemployed workers, was meant to be tongue in cheek.  There definitely would be problems identifying who the eligible workers would be.  Lots of people who are not currently searching for work would all of a sudden be interested if there were a "free" job for them.  Also, my suggestion of a flat check of $32k to all does not consider a wage structure where some people work full-time at minimum wage and make roughly $15k whereas others earn considerably more than $32k.

Since President Obama is currently giving a speech touting his jobs bill on NC State's campus today, here are a few more thoughts about his proposal:
(1) The President's proposed stimulus is poorly targeted in terms of its economic impact.  Most of the temporary tax cut will be saved by a household sector that is still trying to work down debt.  That is why so much has to be spent on the tax cut to generate a single job.
(2) The President's plan is smartly targeted in terms of political impact.  Everyone paying FICA taxes gets a break; the rich (or at least those who are employed) do not get as big a break as they would from a similar across the board cut in the income tax. 
(3) The plan does precious little to invest in the human capital of the long term unemployed (a subject of this previous post).  Vouchers for education or training programs that are targeted at job losers should have been a bigger part of the package.  People who have been out of work for a year or more need more help than a UI check.

Employers say jobs bill won't affect hiring

So says the lead story in yesterday's NYT.  The main reason the jobs bill won't much matter is quite simple: people are not buying enough stuff to warrant hiring additional workers.  The article points out that the companies that are hiring now (NC State MBAs take note: many of them are technology and energy companies) are those where consumer demand is strong.  Reduced payroll taxes and bonuses for hiring the unemployed will often be used, the article points out, to lower the cost of people who would have been hired anyway. 

Some jobs bill arithmetic

Economist Mark Zandi is quoted in yesterday's N&O:

"The president's plan would provide a meaningful boost to the economy and job market in 2012," Zandi concluded. "I expect the plan to add 2 percentage points to real GDP growth and 1.9 million payroll jobs, and reduce unemployment by a percentage point."

The biggest contributor to job growth next year under the Obama plan would be extending the payroll tax holiday for workers, which Zandi estimates would add 750,000 jobs. The portion that is waved for employers would add another 300,000 jobs, he said. Infrastructure spending could add 400,000 jobs.

I entered these numbers into a spreadsheet along with the cost of each program (based on WSJ) of $175b, $70b, and $140b respectively.  You can then calculate how much it costs (in lost revenue or greater expenditures) to create a job.  The numbers are sobering: $233k per job for the payroll tax cuts and $350k per job for the infrastructure spending.  And these jobs would only be around for the duration of the new stimulus package!

My plan for zero unemployment: There were 14m unemployed workers in August.  The $447b stimulus package could be used to generate a check of almost $32,000 to each and every one of them.  As a condition of receiving that check, they would be asked to work at some organization, for profit or nonprofit, for one year.  These jobs would last just as long as the stimulus package and some of them would no doubt turn into real jobs.  Isn't this a plan everyone could support?

Thoughts on the new stimulus, er, jobs plan

Most press attention on the $447 billion package has focused on four major components: a one year cut in the FICA tax for workers ($175b), a one year FICA cut for employers accompanied by additional incentives for those with growing payrolls ($70b), another extension of unemployment benefits along with a few new programs for the unemployed ($62b), and a package of "infrastructure" projects ($140b) that includes funds to rehire teachers, firemen and policemen for one year.  A few reactions, based on economic research:
1) There is a large theoretical and empirical literature that shows that temporary changes in the tax code have very little effect on economic activity.  Households will save most of the tax savings.  In sectors of the economy where jobs do not last more than a year, the tax cut may provide some boost in hiring but in sectors where jobs are expected to last longer, the tax cut pales against the likely future rising cost of health insurance.
2) Economic research also shows that extending the duration of unemployment benefits is highly correlated with unemployed people staying out of work longer.  In my ideal world, recipients would have to start government-supported training programs after six months or more of benefits; paying people not to work creates an obvious disincentive and does not address the shortages of labor in many technical and health-related occupations.
3) Although this was not publicized by the media, there are some original ideas on how to help the unemployed which, if scaled properly, might actually help.  These include tax credits for hiring the long-term unemployed or unemployed veterans, prorated unemployment benefits for those on reduced hours (which would encourage work-sharing over layoffs), and wage insurance to provide a buffer for the unemployed who find new jobs at vastly lower salaries compared to their previous jobs. 
4) State and local governments have already gone through wrenching decisions to pare down education and other government functions as Obama's original stimulus bill has wound down.  The Obama plan would allow these governments to bring back some employees for one more year, but then they would still have to be laid off again unless the stimulus, oops sorry, jobs bill were to become permanent.  Recent research on the 2009 stimulus package showed that giving money to cities and states does not always translate into job creation; it might mean less borrowing or larger payments to pension funds. 
Full details on the President's proposals can be found here.

Serious economic analysis of the stimulus program

The July 2011 issue of NBER Digest profiles a paper by Dartmouth's James Feyrer and Bruce Sacerdote on how much of an impact the 2009 stimulus package had.  They looked at three different types of stimulus that were allocated to state and local governments: block grants to maintain employment of teachers and police, support to low-income families, and the infamous "shovel ready" infrastructure projects.  They find that that dollars that went to family support and infrastructure were  expansionary whereas the block grants did not create many additional jobs.  (The block grants may have done little more than reduce borrowing or scale down tax increases.)  Their overall results are consistent with Keynesian multipliers in the range of 0.5 to 1.0. 

Although Feyrer and Sacerdote call the results highly expansionary, a reasonable person might interpret the results differently on cost-benefit grounds.  If one includes all three types of stimulus, the authors' net result was one job for every $170k in spending. 

Another recent study by George Mason Professor Jeffrey Eisenach and Kevin Caves, cited in a Forbes blog by Nick Schulz, focuses on the stimulus targeted at expanding rural broadband.  This study focused on three large projects in Kansas, Minnesota and Montana.  The key results: these projects cost $349,234 for each unserved household to get access to broadband (and of course not everyone buys broadband even if they have access).  Presumably some jobs were created as well, but this was not addressed in the study. 

Where, oh where, did the stimulus go?

Stanford economists John Cogan and John Taylor look at how households and state/local governments reacted to the 2008 and 2009 stimulus plans.  They show that most of the stimulus money was used by households to pay off debt and most governments used it to issue less debt.  In other words, the federal government borrowed money so that individuals and government could borrow less.  Overall, a wash and hence no real stimulus.  Does not make you real hopeful that this year's temporary cut in payroll taxes will do any better.

Is anyone a Keynesian now?

That's a paraphrase of one of Richard Nixon's most famous quotes: "We're all Keynesians now."  Actually the quote is from Milton Friedman, who less famously said in the same sentence that "nobody is any longer a Keynesian."  So much for irony and the mass media. 

The answer in Europe seems to be "no," as indicated by an NYT article this week.   The United Kingdom has announced plans to cut spending by $130 billion and drop 500,000 public sector workers.  Austerity programs also are in place in Greece and Ireland.  France has raised the retirement age from 60 to 62. 

There appear to still be strong believers in stimulus in the Democratic Party in the US, but not so much among Republicans.  Looking for more irony?  If predicted Republican gains in the Nov. 2 election materialize, will they (like the Obama administration in 2009) look to Europe for policy inspiration? 

The verdict on "Cash for Clunkers"

Guilty of not providing any stimulus.  At all.  The plan only affected the timing of automobile purchases, according to a new National Bureau of Economic Research working paper from Atif Mian (Cal-Berkeley) and Amir Sufi (Chicago-Booth).  The two economists took advantage of the fact that the supply of clunkers varied by city and found that auto sales during the plan were much higher in high-clunker cities than in otherwise similar low-clunker cities.  But once the plan was over, the pattern was reversed.  Exactly. 

The problem with low interest rates

Raghuram Rajan, a finance professor at Chicago's b-school, explains the downside of near-zero interest rates today on NYT's Freakonomics website.  Rajan uses the following scenario to make a key point: suppose that instead of lowering interest rates the government instead decided to subsidize the price of another key input, say energy.  MBA 505 veterans can easily outline the adverse consequences: if the suppliers of energy do not get a subsidy they will shut down and if they do get a subsidy the costs to the budget are the same as traditional stimulus (tax cuts, government spending).  In financial markets the parallel is that either (1) lenders have little incentive to make loans with super-low interest rates and (2) the cost of low interest rates to savers is massive, perhaps on the order of $400 billion. 

Rajan points out additional distortions: too much borrowing will lead to future bubbles that once again will burst with lenders expecting another bailout.  He thinks the Fed should gradually begin to raise rates to 1.5 to 2 percent over the next year.  He also urges a rethink and expansion of programs that prepare workers for the jobs of the future (easier to say than to do, as any labor economist will tell you). 

My own take: low short term rates worked historically to shorten recessions by stimulating housing and consumer durables (such as cars, furniture).  One reason the stimulus is not working so well is that real estate and automobiles are going through structural transformations that will make these sectors permanently smaller. 

German GDP growth surprises

Today's second quarter GDP growth report for the European Union is a mixed bag overall, but contains very good news for Germany which had its fastest growth since reunification.  German growth in 2010: 2 increased by 2.2 percent compared to 2010:1; most forecasts predicted a 1.3 percent increase. 

This is noteworthy for two reasons: (1) Germany is Europe's largest economy so more rapid growth there should help other EU nations and (2) many US economists have criticized the Germans for not doing enough to stimulate their economy.  To get some perspective, the German stimulus package was 50 billion euros, roughly 1.6% of GDP, whereas the US stimulus package in the same year was $787 billion, which clocks in at about 5.5% of GDP.  There are some differences in the timing of the stimulus in each country, with 71% of the German stimulus hitting in 2009 and the rest hitting in 2010.  In comparison, about 15% of the US stimulus went into effect in 2009, 30% in 2010 and the rest in 2011 through 2019. 

Bottom line: expect the German report to stimulate mucho discussion about the effectiveness of the US package.  Warning label: do not read too much into numbers from one quarter. 

A not so great jobs report

The good news in today's jobs report is that the economy added 431,000 nonfarm jobs in May, the largest increase in a decade according to NYT.  The not so good news is that (1) analysts were expecting a net addition of 540,000 jobs and (2) 411,000 of the new jobs were for the Census.  As I have emphasized in earlier posts, one should not make too much out of a single monthly report.  We have now had three straight months of significant job growth, but much of it has been in government jobs.  By the end of the year, the stimulus package will start winding down -- will the private sector be picking up?

Supply and demand for recreational drugs

Secretary of State Hillary Clinton is in Mexico today to discuss our mutual concerns about the violence associated with drug trafficking. Yesterday's WSJ column by Mary O'Grady does a good job of explaining the futility of drug prohibition in simple economic terms. Money quotes:

I suggest that one or two of Mexico's very fine economists trained at the University of Chicago by Milton Friedman sit down with President Obama's team to explain a few things about how markets work. They could begin by outlining the path that a worthless weed travels to become the funding for the cartel's firepower. In this Econ 101 lesson, students will learn how the lion's share of the profit is in getting the stuff over the U.S. border to the American consumer.

Marijuana use, through medical marijuana outlets and general social acceptance, has become de facto legal in the U.S., and demand is robust. The upshot is that consumption is cool while production, trafficking and distribution are organized-crime activities. This is what I called in a previous column, "a stimulus plan for Mexican gangsters."

This is good news on the jobs front?

Lead headline in today's NYT: "Jobless Rate Holds Steady, Raising Hopes of Recovery." The so-called good news is that unemployment held steady at 9.7 percent. The not-so-good news is that employment fell by 36,000. Keep in mind that this is the net change in jobs, equal to vanishing jobs minus new jobs. The optimist will say that the employment number is encouraging given the lousy February weather. The pessimist will point to the paragraph in the article that says we will need to create more than 100,000 jobs each month to bring unemployment down to any significant degree. Somehow I don't think the new jobs bill is going to make a big difference.

Mankiw on fiscal policy

Greg Mankiw's Sunday NYT column summarizes recent research comparing the size of the tax cut and government spending multipliers. The Obama stimulus to date has relied mostly on government spending; all indications are that the next round of "job stimulus" will be more of the same. Mankiw finds that most of the research shows that tax cuts generate a bigger bang per buck. This is contrary to what textbook Keynesian models imply. Mankiw cautions, however, that

economists should remain humble and open-minded when considering how best to fix an ailing economy.

Why some expect a slow recovery

I do not normally link to op-eds by politicians, but last week's WSJ piece by GOP Reps. Hensarling and Ryan is noteworthy for some of the points that they make about government policies and incentives. Hensarling and Ryan are pessimistic about the recovery because (1) the Obama stimulus package did not create any new incentives to work or invest (of course neither did the Bush stimulus a year earlier), (2) the Bush tax cuts expire in 2011, (3) in the takeover of GM and Chrysler the government stiffed secured creditors (e.g., bondholders), and (4) expected future taxes associated with health care and climate change legislation. The combination of higher taxes, uncertainty about regulatory outcomes and massive deficits imposes a huge drag on the recovery. On top of that I would add these considerations: small and medium sized businesses with solid financials still cannot get access to credit and households are reluctant to take on more debt. What Hensarling and Ryan do not mention is that most of the federal stimulus has yet to arrive and the Fed is keeping short term interest rates quite low.

Two different takes on job creation

With unemployment at 10% despite the biggest stimulus package ever, there is more and more talk in DC about a second stimulus focused on job creation. In the last few days WSJ has run two op-eds from very highly respected economists that approach policies to create jobs from very different frameworks. Alan Blinder of Princeton (and former vice-chairman of the Fed) examines public employment and a tax credit for new jobs. Blinder points out that the tax credit would be very hard to implement because there would be countless ways for employers to game the system (e.g., fire workers and hire them back). Michael Boskin of Stanford (and former chief economic adviser to Bush 41) advocates a six percentage point cut in FICA tax. Boskin claims this will create much more stimulus than the package approved last February at half the cost.

A tax credit for new hires

Today's NYT reports that a bipartisan consensus is building around a proposal to give employers a tax credit for new hires. The article reports that wages would be subsidized by 15% in the first year and 10% in the second year in a two year program. The basic economics is very straightforward, employers will hire more people than they would have in the absence of the subsidy and workers will end up with higher wages and salaries. In a severe recession, these might seem like deadweight loss triangles we could live with (at least at first glance), especially compared to the "cash for clunkers" program.

The most significant criticism of this policy is that it will pay many employers a bonus for something they would do anyway. To get a feel for the numbers, employment is about 140 million. For a new worker, this amounts to a 15% cut in the price of labor. Elasticity of demand for labor is about -0.5, so this is likely to result in a 7.5% increase in new hires. So if employers were to create one million new jobs in the next three months, the subsidy would create an additional 75,000 jobs. Of course the employers would collect the subsidy for all 1.075 million jobs, costing the Treasury roughly $8 billion (assuming an average labor cost of $50k), or a bit more than $100k per job.

For the same expenditure, the government could select 160,000 random unemployed persons and give them $50k each per year for two years. Of course we won't see that option discussed. As discouraging as this sounds, the taxpayer cost per job created/saved for the employer tax credit is actually very favorable, especially when compared to the Chinese tire tariff and cash for clunkers.

How economic policy gets made

Great story in this week's New Yorker that goes behind the scenes in the Obama administration and spills the beans on how key decisions about the stimulus package and the auto bailout were made. Fascinating reading for those interested in how serious academics like Christina Romer and Larry Summers interact with the politicos. The article also traces the intellectual odyssey of Summers over the last 20 years. MBA 505 students should note the use of multipliers in the discussion.