August Employment: Flat Line

The BLS employment report for August is not a good one.  Total employment was unchanged - i.e., no net jobs were added - which is really losing ground because about 130,000-ish jobs need to be added each month just to keep up with population growth and technological progress.

Government continues to be a drag - government employment dropped by 17,000, and this would have been worse without 22,000 workers returning to work after the Minnesota shutdown.  The Verizon strike also had an effect, reducing payrolls by about 45,000.  That is, without the Verizon strike, there would have been a gain in private-sector payrolls of 62,000, which isn't particularly good.  Also, the employment growth for June and July were revised downward.

 

The payroll employment number is calculated from a survey of employers. The unemployment rate comes from a survey of households.  Overall, the household survey looks a little better (though it is considered less reliable because it has a smaller sample).  The unemployment rate held steady at 9.1% and the number of people employed rose by 331,000.  The labor force participation rate and employment-population ratio also ticked up slightly.

Overall, this report should help convince the Federal Open Market Committee to take more steps in the direction of "easing" policy, and add urgency to further fiscal policy action to try to stimulate job growth.

On a non-seasonally adjusted basis, payrolls increased by 118,000 (i.e., August is a month that normally has a slight gain, which is removed by the seasonal adjustment).  Non-seasonally adjusted unemployment was also 9.1% (but down from 9.3% in July).

The Fed's Mandate (an Explanation for Sen. DeMint)

Sen. Jim DeMint is describing the Fed's emergency lending during the financial crisis as a "shadow TARP."  In an opinion column for Politico, he writes:

The U.S. government was never meant to be a giant lender for the world’s most powerful banks.

Actually, that is exactly what the Fed was originally meant to do.  The preamble to the Federal Reserve Act is:

An Act To provide for the establishment of Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.

"Furnish an elastic currency" is another way of saying that the Fed should be a "lender of last resort" - lend money to banks whose funding sources can suddenly disappear in financial crises in order to prevent the system from collapsing.  The Fed was founded because the frequent financial "panics" of the late 19th and early 20th century made clear that the US needed a central bank to perform this function.

During the financial crisis, the Fed performed this function with ingenuity and determination, and we would be in a very different - and much, much worse (think "Mad Max") - world if it hadn't.

What is questionable is whether the Fed is fulfilling section 2A of the Federal Reserve Act (added in 1978), "Monetary Policy Objectives": 

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Some of us believe that the Fed could be doing a better job (or at least try harder) of getting us closer to "maximum employment".   Somehow DeMint manages to be concerned that the Fed is failing to achieve "stable prices".  He says:

Americans are feeling inflationary pangs at home, too. The congressional Joint Economic Committee found that since the Fed launched its program of quantitative easing in late November 2008, the value (trade weighted) of the U.S. dollar has declined 14 percent, which translates into higher food and fuel costs.

The graph below shows inflation, measured by the CPI (though I think a 'core' measure, which would show lower inflation recently, is a more appropriate guide for monetary policy) and the unemployment rate.

By historical standards, unemployment is very high now, while inflation is low (and the little tick upward at the end will likely vanish as the effect of the oil price increase earlier this year dissipates).

DeMint also approvingly cites the criticism of Chinese and German government officials:

Leaders from around the world have openly complained about the way the U.S. is intentionally weakening the dollar, since doing so cheapens the value of U.S. debt they hold. After the second round of quantitative easing was announced, Chinese Vice Finance Minister Zhu Guangyao said America “does not recognize, as a country that issues one of the world’s major reserve currencies, its obligation to stabilize capital markets.

German Finance Minister Wolfgang Schaeuble was more blunt, calling the Fed “clueless.”

DeMint appears to believe that US monetary policy should heed the criticism of foreign government officials. Perhaps the mandate of the Fed be changed to focus on the interests of other countries.  I think some people may believe that it should, since the US dollar is the global "reserve currency", but if we're going to do that, we might as well abolish the Fed and turn US monetary policy over to the United Nations.  It doesn't appear that the wording of the Federal Reserve Act is explicit on this point, but I think its pretty well understood that the language quoted above about "the economy", etc., refers to the US economy.  If they don't like our monetary policy, China and Germany (and everyone else) are free to choose other assets to buy.

This San Francisco Fed Economic Letter from 1999 describes nicely how and why the Fed's mandate has evolved.  It might be good reading for Senator DeMint.

Austerity

Washingtonpost.com reports:

A Better Analogy for the Deficit?

The recurrent "government should balance its budget like a household" trope has been one of the more infuriating aspects of recent debates over economic policy.  Its easy to see the appeal for politicians who want to appear to be talking "common sense," but the policy implications are destructive.  In the LA Times, I suggest a different analogy:

Politicians of both parties have furthered the misunderstanding by frequently drawing an analogy between the federal budget and household budgets. "Families across this country understand what it takes to manage a budget," President Obama declared in a February radio broadcast. "Well, it's time Washington acted as responsibly as our families do." While this comparison appeals to a general belief that we should "live within our means," it's also misleading.

Decisions about the federal budget are fundamentally different from those of individual households, because policymakers need to account for how their choices affect the economy as a whole. It is more appropriate to liken government budget deficits to prescription medicine. Just as medication can be helpful to a sick patient, deficits can aid a failing economy.

The debt ceiling debate showed how hard it is for the political system to deal with something that can be good in some circumstances, bad in others.  I hope this is a way of thinking of it that is simple and intuitive, but also right.

Of course, the ideal is to simultaneously have an expansionary policy now, but also a plan for a (roughly) balanced budget in the long run (i.e., after the economy has returned to health).  But the debt ceiling fight illustrated how raising the issue of long term projected imbalances starts a big fight over the ultimate size of government (which isn't what countercyclical policy is about).  With 14 million people unemployed - and interest rates very low - that is a dangerous distraction.

Time to Cash in the Fed's "Credibility"?

Ezra Klein talks to Ken Rogoff:

Since 2008, Rogoff has recommended that the Federal Reserve commit to an extended period in which it will seek to set inflation at 4 percent. That would effectively make debt worth less. That’s anathema to central banks, which have spent the past few decades building their credibility as inflation fighters. But Rogoff is unimpressed. “All the central banks of the world have been fighting the last war,” he says. “This is a once-every-75-years great contraction where you spend your credibility. This is what that credibility is for.”

Update (8/12): Rogoff explains his thinking more in this FT column.

A Silver Lining to the Debt Ceiling Fiasco?

In a recent Project Syndicate column, Stephen Roach shared some observations from recent conversations with Chinese policymakers, who were not pleased with the debt ceiling mess:

Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, “This is truly shocking… We understand politics, but your government’s continued recklessness is astonishing.”

Roach suggests that China may be losing its appetite for US Treasuries, and this, he believes, spells trouble for the US:

So China, the largest foreign buyer of US government paper, will soon say, “enough.” Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of outsize government deficits. That raises the biggest question of all: lacking in Chinese demand for Treasuries, how will a savings-strapped US economy fund itself without suffering a sharp decline in the dollar and/or a major increase in real long-term interest rates?

The US should hope he's right.  An abrupt reversal would be very disruptive, though it would probably do more harm to China than the US (provided the Fed steps in to limit the increase in US interest rates).  But China's massive purchases of US assets aren't a benefit to the US overall - they are part of a policy that has distorted the US economy away from tradable goods production and towards excess homebuilding (and asset bubbles).

The reason China has accumulated gigantic holdings of US Treasuries is that it has been intervening in foreign exchange markets - selling renminbi for dollars - to keep the value of its own currency down and the dollar up.  It then invests the dollars in Treasuries (i.e., the Treasury bond holdings are a consequence of the foreign exchange policy).  The result is US-produced goods are more expensive relative to Chinese goods. This contributes to the trade imbalance and reduces the size of US exporting and import-competing sectors.  Furthermore, many other countries feel the need to undertake similar interventions to maintain competitiveness vis a vis China, so it is not just the bilateral trade balance that is affected.

According to Roach, China has recognized the need to "rebalance" its own economy to rely less on exports and more on domestic consumption:

China has adopted a very transparent response. Its new 12th Five-Year Plan says it all – a pro-consumption shift in China’s economic structure that addresses head-on China’s unsustainable imbalances. By focusing on job creation in services, massive urbanization, and the broadening of its social safety net, there will be a big boost to labor income and consumer purchasing power. As a result, the consumption share of the Chinese economy could increase by at least five percentage points of GDP by 2015.

If the debt ceiling mess has given China's leadership a greater sense of urgency to get on with that, that's a good thing for them, and for us.

Roach's column came out before the S&P downgrade, but that may have reinforced China's views.

S&P Downgrade: Its the Institutions, Not the Debt

S&P just downgraded US government bonds from "AAA" to "AA+".  Their explanation:

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

That is, the downgrade has as much to do with the US political system as it does with debt levels.  The ugly spectacle of a faction of one political party taking the economy hostage in the debt ceiling debate has trashed the rating agency's (and everyone else's) confidence in Washington's ability to make difficult compromises.

July Employment: Merely Bad

Arriving the day after a stock market plunge set off renewed talk of a "double dip" recession, the July employment report almost looks good because it is merely bad.  According to the BLS, in July the economy added 117,000 jobs and the unemployment rate ticked down to 9.1% (from 9.2%).

Employment growth of 117,000 is just about the "treading water" level needed to keep up with population growth and productivity improvements, so it doesn't represent any progress in digging out of a deep hole.   Government continued to be a drag - private employment rose by 154,000, but government jobs fell by 37,000 (of which state government accounted for 23,000, which the BLS says was "almost entirely" due to the Minnesota shutdown).

Also, the employment growth figures for May and June, which had contributed to the economic fears, were revised up to 53,000 and 46,000, respectively (still quite bad, but better than 25,000 and 18,000 previously announced).

Employment (Nonfarm Payrolls, Seasonally Adj.)

The decline in the unemployment rate was due to people leaving the labor force, not job gains - in the survey of households (different from the survey of firms from which the headline jobs number is calculated), the number of people employed fell by 38,000, but the number of people in the labor force fell by 193,000.  The labor force participation rate therefore decreased, as did the employment-population ratio.

Employment-Population Ratio (Seasonally Adj.)

Not a good report, but one that suggests the economy is stagnating, not falling into a recession.  That might take the some of the edge off of yesterday's panic, but, then again, a little panic might be what we need to rouse policymakers into action....

2Q GDP: Bad Present, Worse Past

Even with expectations low, today's advance estimate of second-quarter GDP from the BEA was disappointing.  Real GDP grew at a 1.3% annual rate in the second quarter of 2011, and the first quarter's growth rate was revised downward to 0.4% (from 1.9% previously estimated).

Government purchases - the G component in the national income accounting identity - was a drag on real GDP for the third consecutive quarter.  In the second quarter, G decreased at a 1.1% annual rate (larger declines in federal nondefense and state and local government spending were partly offset by an increase in defense spending).  Consumption was basically flat (increasing at 0.1% annual rate), while investment rose at a 7.1% pace.  Net exports also made a positive contribution: exports increased at a 6% rate, compared to 1.3% for imports.

Today's release incorporated a large "annual revision" of past data, and it indicates that the recession was worse than previously believed: real GDP shrank 0.3% in 2008 and 3.5% in 2009 (compared to previous estimates of 0% and -2.9%).  This graph from Calculated Risk shows the changes:

According to the revised numbers, real GDP has not returned to its pre-recession level, as we had previously believed.

This makes the badness of the labor market somewhat less of a puzzle - the rise in unemployment had been more than the fall in output seemed to warrant based on historical relationships, but now we know that output was lower than we thought.

In this deep hole (and with long-run interest rates remaining very low), the policy focus on budget cuts makes no sense, of course.  Ryan Avent has a good analogy:

IN 2007, the great ship of the American economy began encountering darkening skies. In 2008, it was suddenly faced with a violent storm which blew it miles off course, well south of where it ought to have been. The country's leaders didn't know how far from their charted path they'd been swept, but they recognised a need to make a course correction. Now, three years later, a look at the maps tells us that the storm was more powerful than previously believed, and it left the vessel much farther south than anyone had expected. The course corrections made earlier? Far too small to bring the ship back to its previous path. Yet none of America's leaders are trying to steer the ship back northward. Indeed, many seem anxious to yank on the tiller and drag the economy farther south still.

Brad Plumer has a nice post on what the data suggest about the recovery act (a.k.a., the "stimulus"), and Brad DeLong has some quick policy suggestions (though there's little reason to hope we'll see anything like them).   Real Time Economics rounds up Wall Street "economist" reaction.

The Most Interesting Man in the World?

The January issue of Economica included a symposium in honor of A.W. (Bill) Phillips, marking the 50th anniversary of his original "Phillips Curve" article.  The first article is a biographical essay by Alan Bollard, which is fascinating reading:

The young Bill was clearly very talented, but his parents reluctantly decided that they could not afford to keep him at school, and any dreams of a university education were abandoned. Aged 15, Bill signed up as an apprentice electrician with the government's Public Works Department, which at that time was building infrastructure around rural New Zealand. He spent the next few years roughing it at working men's camps in remote rural sites, helping to build hydroelectric dams to generate electricity for the national grid. Bill had played with photography and seen early movies, and he was fascinated by the idea of ‘talkies’. He hired a hall in the Tuai camp and set up the first talkies cinema. Recreation involved playing his violin, riding an acquired motorbike and reading his treasured encyclopaedia of world religions.
 

But rural New Zealand was not enough. Phillips wanted to sample the world. In 1935, still aged only 21, he packed his swag and his fiddle, and shipped to Australia. Here he spent a couple of years travelling the outback, hitching rides on freight trains and working in mining camps. Money came from a range of jobs: picking bananas, working on building sites, mining gold, running a cinema, and even crocodile hunting. These were tough jobs in a rough country, but at the same time Phillips had set his intellectual sights higher. He enrolled in a correspondence course in electrical engineering and remembers learning his first differential equations under a harsh Australian sun at an outback mining camp.
 

Phillips had a lifelong fascination with Eastern cultures. In 1937, despite the worsening international situation, he boarded a Japanese ship to travel to Shanghai. While he was at sea, the Japanese invaded Manchuria, and the ship was diverted to Yokohama. Phillips took advantage of this by travelling around the newly militarized Japan; at one point he was detained by the authorities, who suspected that he might be a spy. Eventually he made his way out through Korea, Manchuria and Harbin, and crossed Russia on the Trans-Siberian railway. With Antipodean optimism, he looked for casual jobs across Soviet Russia, only to find them all taken by political prisoners. From Stalin's Moscow he travelled on through threatened Poland and Nazi Germany during the fragile last years of peace. He settled in London, where he found work as an electrical engineer. Having continued his correspondence course, Phillips now graduated from the Institute of Electrical Engineers, gaining his first formal qualifications. He also took classes in several languages.

Fortunately, Economica has given free online access, so you can read the rest, including his World War II adventures.  There is also the story of his famous machine - I posted a video of it in operation here.