Economy – Page 10 – Donald Marron

8 Million Jobs Lost

Kudos to Floyd Norris over at the New York Times for characterizing total job losses to date as 8 million jobs, not “just” 7.2 million. As I discussed on Friday, the Bureau of Labor Statistics estimates that the number of jobs in March 2009 was 824,000 lower than it previously thought. But BLS won’t include this adjustment in its official data until early February.

The official, as-yet-unadjusted data indicate that 7.2 million jobs have been lost since the recession started in December 2007. The future revision to March figures, however, implies that a better estimate would be 8 million.

We can now expect several months in which commentators use different figures for total job losses. Those steeped in the details, like Norris, will use the 8 million figure. Those less-attuned to the details, like the authors of the NYT’s lead editorial (just four pages after Norris’s article), will use the 7.2 million figure.

Norris also addresses the obvious question: Why did BLS miss the March level of jobs by such a large amount? The answer is that BLS has to estimate jobs gained and lost at certain employers, and their model is not doing as well as we (or it) would hope:

The official job numbers are based on a monthly survey of employers, augmented by something called the “birth-death model,” which factors in jobs assumed to have been created by employers who are too new to have been included in the survey, and subtracts jobs from employers assumed to have failed and therefore not responded to the latest survey.

Victoria Battista, an economist at the Bureau of Labor Statistics, said the bureau was looking at whether that model needed to be changed, as well as at other possible issues, such as changing response rates to the questionnaire sent out to employers each month.

The newest revision is called a “benchmark revision.” Such revisions are disclosed each October, and led to reductions in job totals in both 2007 and 2008. But the changes those years were tiny when compared with the changes this year.

For the 12 months through last March, the birth-death model added 717,000 jobs to what the bureau would have reported had it relied solely on its survey.

While the government uses the survey of employers to estimate the number of jobs, the benchmark revisions are based on reports from states on the number of employees for whom unemployment insurance premiums are paid. Those numbers take longer to be available, but are considered to be more reliable.

The Changing Distribution of Worker Earnings

On Friday, the Congressional Budget Office released a new study examining how worker earnings changed from 1979 through 2007. The report is full of important facts about the evolution of earnings throughout the earnings distribution and, in particular, among the highest earners.

For example, the following chart illustrates how the earnings of men and women (age 25-54) have changed at different points in the earnings distribution:

Earnings of Men and Women

The chart confirms two well-known findings: men, on average, earn more than women, and high-earners have seen the largest earnings gains in recent decades. Other takeaways include:

In real terms (i.e., adjusting for inflation), men at the 10^th and 50^th percentiles (of the male earnings distribution) in 2007 earned about the same as similarly situated men back in 1979.
Women’s earnings have been growing faster than men’s. Women at the 10^th and 50^th percentile (of the female earnings distribution), for example, had higher earnings in 2007 than their counterparts in 1979.
Women at the 90^th percentile in 1979 earned a bit less than the median man. In 2007, however, a woman at the 90^th percentile earned 66% more than the median man.

The following chart illustrates how earnings have evolved among the top 10% of men and the top 10% of women from 1989 to 2007:

Continue reading “The Changing Distribution of Worker Earnings”

1.1 Million More Jobs Lost

Today’s jobs report was weak across the board: September payrolls fell by 263,000, the unemployment rate rose to 9.8%, the underemployment rate (U-6) rose to 17.0%, and average weekly hours fell to 33.0, tying the record low set in June.

The Bureau of Labor Statistics also reported that payrolls declined by 13,000 more in July and August than it had previously estimated.

And if that weren’t enough, BLS also estimates the number of jobs back in March was actually 824,000 lower than previously reported (this is an estimate of the “benchmark revision” that BLS will make to the data early next year).

Putting these figures together, we find that the number of jobs has now declined by 1.1 million (263,000 + 13,000 + 824,000) more than we previously knew.

I have always found it frustrating that the BLS reports an estimate of the benchmark revision each October, but doesn’t incorporate that revision until the following February. That means that many analysts will be using incorrect data over the next few months.

If you want to know the number of jobs lost during the recession, for example, you might think you could get that number by clicking over to the BLS and comparing the number of jobs in September 2009 to the number of jobs in December 2007. That comparison would show total job losses of 7.2 million. Based on today’s estimate of the benchmark revision, however, it’s likely that the actual figure is more than 8.0 million.

Update: The original post had a typo for the average weekly hours; as noted above, the correct figure is 33.0, not 30.0.

Still Broad Weakness in Q2 GDP

Earlier today, the Bureau of Economic Analysis released updated GDP figures, estimating that the economy contracted at a 0.7% pace in the second quarter. The BEA’s well-named “third estimate” thus indicated that the decline in the second quarter was somewhat slower than the 1.0% BEA had previously estimated.

As I mentioned a couple of months ago, whenever the GDP data come out, the first thing I look at is Table 2, which shows how much different sectors of the economy contributed to the growth (or, in this case, the decline). Even with the small upward revision, the most striking thing about Q2 continues to be how broad the weakness was:

As the chart shows, Q2 witnessed declines in every major category of private demand: consumer spending, residential investment, business investment in equipment and software (E&S), business investment in structures, and exports. Wow. To find the last time that happened, you have to go all the way back to … the fourth quarter of last year, when it was even more severe. But before that, you have to go back five decades to the sharp downturn of the late 1950s.

Not surprisingly, government spending helped offset the declines in private spending. Most of the boost came from defense spending (a contribution of 0.7 percentage points), but state and local investment also helped (adding 0.48 percentage points, presumably at least in part due to stimulus spending).

A sharp decline in imports, finally, was the biggest contributor to growth in Q2, at least in an accounting sense. As I’ve noted before, it’s important to choose your words carefully here, since declining imports are clearly not the path to prosperity. In a GDP accounting sense, however, import declines do boost measured growth. Why? Well consider the fall in consumer spending. That decline affected both domestic production and imports. GDP measures domestic production, so we need a way to net out the decline in consumer spending that was attributable to imports. That’s one of the factors being captured in the imports figure.

Note: If the idea of contributions to GDP growth is new to you, here’s a quick primer on how to understand these figures. Consumer spending makes up about 70% of the economy. Consumer spending fell at a 0.9% pace in the second quarter. Putting those figures together, we say that consumer spending contributed about -0.6 percentage points (70% x -0.9%, allowing for some rounding) to second quarter growth.

IMF: The Lasting Effects of Financial Crises

Earlier this week, the IMF released a key chapter from the upcoming World Economic Outlook: Chapter 4: What’s the Damage? Medium-Term Output Dynamics After Financial Crises. As noted in the much pithier summary, the report concludes that:

The global financial crisis is likely to leave long-lasting scars on the world economy, but governments can act to stimulate a quicker revival and counter output losses … . The study finds that banking crises typically have a long-lasting impact on the level of output, although growth eventually recovers. Lower employment, investment, and productivity all contribute to sustained output losses.

Those conclusions are based on their review of financial crises around the world since the early 1970s. As shown in the following graph, the key finding is that after a financial crisis economic output remains below trend for years:

The blue line shows, for example, that in the average country, output seven years after the crisis was about 10% below what would it would have been if the pre-crisis growth rate had continued.

The dotted red lines, however, highlight the enormous range of outcomes. At least one-quarter of the countries eventually had output that was above the level implied by the earlier trend; while another quarter eventually fell at least 25% below the prior trend.

The study slices and dices this result in numerous ways, trying to identify the factors that lead to better or worse outcomes. Some are bad news for the United States.

Continue reading “IMF: The Lasting Effects of Financial Crises”

Lessons from the Fall of Lehman

As you have undoubtedly noticed, this week marks the one-year anniversary of the fall of Lehman Brothers–the moment at which the financial crisis became a severe economic crisis.

I did an interview on Fox Business on Tuesday to discuss some of the lessons learned. (My wife’s comment on the interview: “You need to straighten your collar next time.”)

Going in, I had two basic points I wanted to make:

First, the fall of Lehman Brothers was the moment that the abstract threat of “systemic risk” became tangible to many policy makers and the public. As we progressed from propping up Bear Stearns to taking over Fannie Mae and Freddie Mac, many observers began to suffer from policy fatigue, and, in some circles, there was concern that the scale of the government actions might be disproportionate to the alleged, but little-seen, risk of a systemic crisis. That changed when Lehman fell, and the dominoes started toppling.

Second, we still have our work cut out for us. The major items on our to do list include:

(1) Taking steps to avoid such enormous shocks in the future (e.g., by increasing capital requirements and reducing allowed leverage for financial firms).

(2) Fixing the problem of too-big-to-fail (or, if you prefer, too-interconnected-to-fail). Unfortunately, this problem has worsened, in many ways, since the crisis began. Some gigantic firms have grown even larger. And the necessary interventions to prop up the financial sector have reinforced the idea that the government will prevent these firms from failing in the future.

(3) Disentangling the government from private firms, so that it can again act as a referee, not as a player. That will take time given the enormous investment portfolio that the government has amassed in financial firms and the auto companies. It is heartening, however, that even Citigroup is beginning to ponder how to raise outside capital and reduce the government stake.

Wall Street Goes to Washington

A front page story in today’s Washington Post (“In Shift, Wall Street Goes to Washington“) documents the Capital’s rising importance in the financial world:

J.P. Morgan Chase for the first time convened its board in Washington this summer, calling the directors to a meeting at the downtown Hay-Adams hotel, then dispatching them to Capitol Hill for meet-and-greets.

Last month, a firm run by the billionaire investor Wilbur Ross hired the head of Washington’s top mortgage regulator to pick through the wreckage of the housing bust looking for bargains.

And the world’s largest bond fund, Pimco, which has traditionally assessed the risk of any new investment according to five financial criteria, recently added one more: the impact of any change in federal policy.

…

“In the old days, Washington was refereeing from the sideline,” said Mohamed A. el-Erian, chief executive officer of Pimco. “In the new world we’re going toward, not only is Washington refereeing from the field, but it is also in some respects a player as well. . . . And that changes the dynamics significantly.”

The Ross example doesn’t tell us much — the financial world has always recruited government officials. The J.P. Morgan and Pimco examples, however, highlight how much the playing field has changed over the past two years. Washington is not just a more aggressive regulator. Given the stresses on the system, it has become a serial intervener — stepping in to prop up specific firms or credit channels that appear too important to fail. And it is now a major investor, with a burgeoning portfolio of investments in financial firms, auto companies, and mortgage backed securities.

As we commemorate the first anniversary of the fall of Lehman, it appears that the worst of the financial and economic crisis is behind us. And the policy conversation should increasingly focus on exit strategies. Not just the narrow question of how the Federal Reserve eventually unwinds the extraordinary expansion of its programs. But also how the Treasury eventually unwinds it TARP investments. How the FDIC walks back from offering guarantees on bank debt. How the government restructures Fannie Mae and Freddie Mac.

And, perhaps most importantly, how policymakers recalibrate their relationship with financial markets. To paraphrase Mohamed A. el-Arian: can Washington return to being a referee on the sidelines or will it continue to be a player?

How Much Did Cash-for-Clunkers Boost Auto Sales?

The busy folks at the Council of Economic Advisers (CEA) released a quartet of studies today, covering the economic impacts of:

I suspect that other bloggers (not to mention the regular media) will have lots to say on the stimulus analyses, so I started my reading with the clunkers piece, which I found quite interesting.

News accounts often describe the program as a success because almost 700,000 people participated in it in just a few weeks. But, as CEA emphasizes in their new study, the fact that someone participated in the program does not necessarily mean that they bought a car because of it. Indeed, CEA estimates that the 690,000 auto sales under the program boosted 2009 auto sales by only 330,000:

What about the other 360,000?

Continue reading “How Much Did Cash-for-Clunkers Boost Auto Sales?”

Why Economists Messed Up

The biggest thing in economics today is Paul Krugman’s “How Did Economists Get It So Wrong?” in the New York Times Magazine. If you have any interest in macroeconomic policy, you should read it.

For one thing, the illustrations by Jason Lutes are quite entertaining:

More important, though, is Paul’s evaluation of how we economists missed the 800-pound gorilla in the room. He fingers three suspects:

Mistaking beauty for truth. I.e., too much reliance on elegant, solvable, mathematical models in which economic players are rational and markets adjust to shocks easily. These models are a joy to play with — and provide important insights — but they miss messy truths about the actual economy.

Excess confidence in financial markets. He argues that widespread acceptance of the efficient markets hypothesis (the idea that asset prices incorporate all information and thus get prices “right”) left us blind to the risks of asset bubbles.

The limits of mainstream macroeconomics. This critique is harder to summarize, but in a nutshell he argues that (a) some economists have (incorrectly) embraced the classical view that the government can’t and shouldn’t try to moderate the business cycle and (b) the larger body of mainstream of economists have (correctly) embraced the Keynesian view that the government can try to moderate the business cycle but have (incorrectly) concluded that the Federal Reserve is the only appropriate tool to do so.

I think each of these charges has merit, with one caveat. Back in graduate school, I was indeed taught that monetary policy was the preferred tool for addressing economic weakness (e.g., because of policy lags and concerns about the political economy of what passes as fiscal stimulus from the Congress). In my years in Washington, however, I have met many economists, of the left, right, and center, who believe in fiscal policy as well. Indeed, in policy circles, the idea of fiscal stimulus was active in 2001, 2003, 2008, and 2009, each of which witnessed tax cuts (and, in the most recent case, spending increases) that were partly or wholly passed in the name of stimulus. One can debate the merits of those acts, but the concept of fiscal stimulus has been alive and kicking.

Paul’s recommendations for the way forward for economists:

First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

On his final point, I should note that one of the leading thinkers on the links between finance and macro is none other than Ben Bernanke, current (and, one hopes, future) chairman of the Federal Reserve. That’s one of the reasons he’s the right person for the job.

Related commentary: EconomistMom, Barry Ritholz, Paul Kedrosky, Brad DeLong, and Paul Krugman himself.

Unemployment Still Rising

Today’s jobs report didn’t deliver any real surprises. The number of payroll jobs fell by 216,000 in August, slightly less than expectations, but revisions to earlier months subtracted an additional 49,000 jobs. The unemployment rate rose to 9.7%, more than expected and consistent with the consensus view that unemployment will exceed 10% in coming months.

In short, we are still losing jobs, but at a much slower pace than earlier in the year.

Looking further into the details, there are two things I’d highlight. First, the U-6 measure of unemployment, which includes workers who are discouraged or working part-time for economic reasons, increased even more than the regular unemployment rate, rising from 16.3% to 16.8%:

Second, unemployment among teenagers in August was the highest ever recorded. More than 25% of teenage workers were unemployed in August, topping the previous peak of 24.1% set in late 1982:

Teenage unemployment jumped sharply from July to August, rising from 23.8% to 25.5%, an increase of 1.7 percentage points. In comparison, unemployment among adult men increased by “only” 0.3 percentage points and among adult women by 0.1 percentage point.

I predict that the econo-blogosphere will feature some healthy debate about whether the sharp increase among teenagers has anything to do with the most recent increase in the minimum wage that went into effect toward the end of July (and, therefore, after the July unemployment data were collected). As you would expect, teenagers are more likely to earn the minimum wage than are adult workers. If the latest minimum wage increase had immediate, negative effects on employment, you might therefore expect to see it among teenagers.

On the other hand, the chart shows that teenage unemployment can be quite volatile from month to month; as a result, analysts should be humble about what they can infer from the changes observed during a single month. Moreover, teenage unemployment has been rising rapidly throughout the downturn, which may reflect the intensity of the economic weakness rather than a series of increases in the minimum wage.

My advice: Before accepting or rejecting the idea that the recent minimum wage hike has hurt teen employment, wait to see whether any enterprising economists come up with compelling data that go beyond the month-to-month pattern. For example, it would be interesting to see comparisons among states. Some states had minimum wages above the federal level, and thus were unaffected by the recent increase.