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A note on the unemployment figures released earlier this morning by the Bureau of Labor Statistics (BLS), reporting the results of a January survey of U.S. households: The seasonally adjusted unemployment rate fell from 9.4 percent in December to 9.0 percent last month, a healthy improvement. On the other hand, before seasonal adjustment, the unemployment rate rose from 9.1 percent in December to 9.8 percent in January. Raw data that are not seasonally adjusted show that the number of unemployed Americans rose by 940,000, while the number employed fell by 1,560,000. New adjustments for population changes, introduced by the BLS this month, affected these numbers by an amount that is possibly very large and that is not yet known to me. This latter problem probably affects raw numbers more than the overall unemployment rate. The seasonally unadjusted numbers used in this blog post can be found in table A-1 of the recent economic news release from the BLS.

In December, the Levy Institute issued a working paper that asked how the economy might be affected by the seemingly unusual fiscal and monetary policies implemented by the Fed and other central banks since 2008. The authors, Dimitri Papadimitriou and I, used a phrase that is not often spoken in this era by governments and central banks around the world: “monetizing the deficit.” This phrase traditionally describes the practice of financing a government deficit with money that is “printed” rather than borrowed or raised by taxation. We feel perhaps a little more comfortable with our use of these words in light of a recent blog entry on the Financial Times website Alphaville. The blog reports that the Fed has come close to running out of securities to buy in the markets for certain types of government bonds, having bought so many of them already. Hence, it is increasingly resorting to the purchase of recently issued bonds and notes, which it had apparently sought to avoid. This development makes the link between deficit spending and monetary policy initiatives such as the current round of “quantitative easing” in a monetary system like ours easier to grasp. If the Fed buys a Treasury security almost immediately after it is issued, there is less reason than ever to think of the financing process as anything other than the use of the Federal Reserve’s “printing press” to pay for government operations–an essential use of “monetization” to stimulate the economy and avoid drastic fiscal measures during a time of weak tax revenues…. Read More

Reading the back and forth between Brad deLong and David Leonhardt over the structural versus cyclical nature of unemployment during the Great Recession, a question nagged at me, spurred by this quote from Leonhardt: The data that the Bureau of Labor Statistics released on Thursday gives me a chance to explain why I disagree. In short, the relative performance of more educated and less educated workers over the last few years has not been the typical pattern for a recession. Less educated workers, by many measures, are faring worse than they ever have. The ratio of the typical four-year college graduate’s pay to a typical high-school graduate’s pay hit a record in 2010 — 1.56. Since 2007, the inflation-adjusted median weekly pay of college graduates has risen 1.6 percent. The inflation-adjusted pay of every other educational group — high school dropouts, high school graduates and people who attended college but did not get a four-year degree — has fallen since 2007. The same is true over the last decade; amazingly, only college graduates have received a raise.

Last summer, this blogger posted a graph showing the path followed by U.S. long-term interest rates since 1925.  There has been some interest in a new and updated graph, especially in light of concerns that bond markets might soon demand higher yields as the economy expanded. One appears above. Reasons for apprehension about a possible jump in yields vary and include large federal deficits, which increase the amount of bonds that must be absorbed by the market, as well as concerns about a possible resurgence of inflation driven by quantitative easing (QE) and a near-zero Federal Funds rate.  The Financial Times [homepage link] and some other newspapers have been reporting recently on a perhaps greater threat to price stability worldwide: a continuing run-up in the prices of some key agricultural commodities, brought about mostly by factors other than macroeconomic policy.  There has been some discussion of rising yields for long-term government bonds, but the long-term perspective offered by the figure above shows that interest rates remain very low by historical standards, at least for now. Moreover, real yields on federal inflation-indexed securities remain quite low indeed, and in some cases negative, as shown, for example, by the green line in the figure below. Broadly speaking, such yields are what markets expect certain inflation-protected bonds to yield in addition to compensation… Read More

The Economic Policy Institute has produced an interesting analysis on jobs lost and recovered in U.S. post-war recessions. They show how many months were needed, since the beginning of a recession, to get back to the initial employment level. However, the working population is growing over time, so getting back to the employment level of, say, 12 months ago, would not be sufficient to restore the same employment and unemployment rates. In our chart we assume that population grows at its annual average (around 1.4 percent), and calculate how long it took for employment to get “back on track”, i.e. we compare actual employment with what employment should have been, if jobs grew along with active population. With our modified chart, employment got back on track within three years only in the recession which started in 1969. In all other cases, employment was still below its pre-recession path after three years. In the current (last?) recession, employment still has a long way to go before we can talk of a “recovery.”

At the last meeting of the American Economic Association in Denver, Giuseppe Fontana discussed the theoretical arguments on whether the Great Recession will generate a permanent loss in output. He argued that, according to the dominant “New Consensus” theory, output should return to its historical path once the shock has been absorbed. Alternative, heterodox theories, suggest that the shock will have permanent effects. In the chart we plot U.S. real GDP along with its trend, estimated using a simple exponential function over the pre-recession period (from 1970 to 2007). The average growth rate in output over this period was slightly above 3 percent. The dotted red line plots the evolution of GDP, should it resume its average, pre-recession, growth rate. The red line therefore represents the idea that the recession will have permanent effects. The green dashed line has been drawn under the assumption that the economy gets back to its pre-recession growth path by the end of 2015. Real GDP needs to grow at 5.2 percent from now to 2015, to achieve this result…

Yesterday, the Obama administration announced that it wants to freeze wages and salaries earned by federal government employees in calendar years 2011 and 2012. Most federal workers might otherwise have received a cost-of-living raise at the start of the new year. There has been some controversy about whether these workers are overpaid. In this post, I report some information that I have gleaned from the web about the pay scale for most white-collar positions in the federal government, which is known as the “general schedule” (GS). The government’s Office of Personnel Management (OPM) states that “the General Schedule (GS) classification and pay system covers the majority of civilian white-collar Federal employees (about 1.3 million worldwide) in professional, technical, administrative, and clerical positions…” For 2010, the pay scale for federal GS employees is shown in the table below. This is the table for employees who work in geographic areas where the cost of living is not unusually high. An explanation of the table follows. Grade Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 Step 10 1 17803 18398 18990 19579 20171 20519 21104 21694 21717 22269 2 20017 20493 21155 21717 21961 22607 23253 23899 24545 25191 3 21840 22568 23296 24024 24752 25480 26208 26936 27664 28392 4 24518 25335… Read More

Developments surrounding the recent G-20 summit further underlined some starkly conflicting views among key global policymakers, an important “American-German divide” in matters of macroeconomic policy in particular.

In an interesting (pun intended) post (Economist’s View: Interest on Reserves and Inflation) Mark Thoma says that the Fed’s paying banks interest on their reserves does not dampen investment, for two reasons, one on the supply side and one on the demand side. On the supply side of the market for loans, Thoma points out that 0.25% (the rate the Fed is paying on reserves) isn’t that high. On the demand side, Thoma says that businesses have a lot of cash on hand that they’re not using to invest, meaning the demand for loans isn’t really there. I want to take issue with the second point, because while large corporations may indeed have a lot of cash on hand, small businesses and households don’t. And they are the ones who are being denied access to credit.

This idea first occurred to me while I was in France in September. I marveled that the debate they’re having (complete with effective social mobilization), is about raising the retirement age to 62. The current Social Security retirement age is 67, and the ‘serious’ proposal from Bowles-Simpson is to index it to life expectancy. This proposal sounds reasonable. But life expectancy, like income, is unevenly distributed. As Paul Krugman and Tom Tomorrow have both pointed out, life expectancy has been increasing much more rapidly for the well-off, not for the rest of the workforce. My proposal is to implement a progressively higher retirement age for low, middle, and high-income workers. If chosen well, the tiered retirement ages by themselves could eliminate the relatively small projected shortfall twenty-five years from now. When I have time, I plan to run some numbers, but I think that such a system could lower the retirement age for low-income workers. This proposal would allow more of those workers who do the back-breaking and health-damaging work of our society to retire while they still have some time to enjoy it. Of course, for most of the working poor, social security alone is unlikely to provide a comfortable retirement. But the point of this counter-proposal is simply to shift the burden of balancing the small imbalance in… Read More

With the recent announcement of QE2 (quantitative easing 2), the Federal Reserve’s new round of long-maturity asset purchases, it is worth looking at some of the effects of QE1. In November 2008, the Fed announced large-scale purchases of mortgage-backed securities and debt issued by the GSEs. Its securities holdings began to climb sharply in early 2009. As shown in blue, the monetary base (a broad measure of the Fed’s liabilities) had already begun to rise several months earlier. New asset purchases for QE1 ended earlier this year. The effects of QE1 and the other stimulative policies adopted by the Fed since late 2008 will be debated for some time to come. But notably, the green line shows that a trade-weighted index of the dollar’s value against a basket of foreign currencies has declined quite a bit. Some world leaders are unhappy about this development, but it may have helped to spur real (inflation-adjusted) U.S. exports, shown in red. The orange line shows the yield on a 10-year inflation-indexed Treasury security, which can be used as a measure of the real interest rate. This rate has tumbled from well over 3.5 percent to negative levels. Some economists doubt that a monetary authority such as the Fed can succeed in reducing real long-term interest rates over a prolonged period, but this is… Read More

In recent weeks, the explanation for the financial and economic crisis that has gripped the world economy has shifted sharply from deregulation and lack of governmental oversight of financial institutions to fraud and criminal activity. In truth, the US Federal Bureau of Investigation began to warn of an “epidemic” of mortgage fraud back in 2004, and my colleague Bill Black has been pointing to the role played by fraud since the crisis began. (See our recent two part series at www.huffingtonpost.com.) To be sure, there was ample fraud in the “pump-and-dump” schemes during the dot-com bubble at the end of the 1990s, which was closely followed by the commodities market speculative boom and bust. (See my article at http://www.levyinstitute.org/publications/?docid=1094. ) And before those episodes we had in quick succession the developing country debt crisis of the early 1980s, the US Saving and Loan fiasco of mid 1980s (with bank crises in many other nations), the Japanese meltdown and the Asian crisis, the Mexican peso crisis, Long Term Capital Management and Russian default, and the Enron affair. Seemingly, the crises have become more frequent and increasingly severe until almost the whole world was infected. It is obvious that there must be some link among these crises and that while fraud played a role in most or even all of them, it… Read More