Friday, August 27, 2010

Payments to Veterans and Survivors

Professor Ryan Edwards writes

"I recently put out an NBER wp that looks at historical war costs and reports that between a half and a third of the present value of costs are long-lived payments to veterans and survivors, and that the half lives of payments have averaged 30 years.

One of the big questions this raised in my mind was what the broader macro effects of war spending really was, since it's clearly not (or at least, no longer) a temporary shock as in the standard textbook model."

Wednesday, August 25, 2010

Quarterly Housing Prices through 2010 Q2

still waiting for the Case Shiller June 2010 value, but that would have to be way out of bounds to put Q2 below Q1.

The Costs of War

Copyright, The New York Times Company

As the midterm elections approach, Democrats and Republicans will each try to convince us that their party wasted less tax money than the other. The stimulus law and the Iraq War will be favorite examples. So let’s examine some economic principles for valuing the human cost of the war.

More than 4,000 American troops have been killed in Iraq and more than 30,000 wounded. And these totals do not begin to count the human losses among the civilian personnel and the militaries of other countries.

At the same time, the Congressional Budget Office recently estimated that the United States Treasury spent about $700 billion on military operations in Iraq between 2003 and 2010. That total includes some human costs but not others.

The United States has an all-volunteer military, which means that personnel chose to serve their country and accept the risks associated with a military occupation, in exchange for salary, training, benefits and any nonpecuniary benefits that military service offers.

It would be double-counting if a monetary value of military deaths and injuries were added to the military payroll, unless a subtraction were made for the hundreds of thousands of troops who received salaries and benefits and finished their Iraq duty without injury. At the same time, the time frame for American military expenditures should reflect the time frame over which personnel are compensated for the risks they accept.

Some commentators
have noted that future Department of Defense expenditures on Iraq veteran health and other benefits should be counted, and I agree. Part of the deal for volunteer military personnel is that they and their family will receive retirement benefits and help with medical expenses for the rest of their lives. In this regard, expenditures on the Iraq war could continue for more than 100 years, although presumably at a reduced rate (the last Civil War veteran’s widow died in 2004!).

When the Iraq war began, active and reserve military personnel were obligated to serve when asked, a consequence of the salary and other benefits they had been receiving since enlisting in the military. For this reason, expenditures to compensate for the human cost of the Iraq war began actually before the war did, in 2003, and probably date back to the 1980s.

None of this counts the lost lives and health among Iraqis. So it’s clear that the Iraq war cost more than the $700 billion so far tabulated by the Congressional Budget Office.

Friday, August 20, 2010

The Supply of Bureaucratic Nightmares

The AP reports today

"Many borrowers have complained that [Obama's mortgage modification] program is a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork."

I am not surprised because, as I wrote earlier this year, "lenders have an incentive to foreclose on borrowers deemed modification eligible by the federal programs." Rather that overtly contradicting the U.S. Treasury by denying eligible borrowers, banks are just encouraging borrowers to deny themselves.

Wednesday, August 18, 2010

The Seasonal Job Surge: Supply or Demand?

Copyright, The New York Times Company

Keynesian economists designed a fiscal stimulus law that targets aggregate demand and runs roughshod over supply incentives. Evidence on the seasonal labor market shows why their stimulus was ultimately self-defeating.

Keynesian economists contend that labor supply — the willingness of people to work — doesn’t matter right now (or even that a more willing work force would reduce employment). If they are right, then a stimulus law that increased spending might work even if the law were taking incentives away from people to work and employers to hire.

Under the assumption that the cycle for teenage employment is a supply phenomenon — that is, the seasonal surge is more a result of teenagers’ becoming available for work than it is a change in employer demands — I showed last week that the Keynesians are wrong. Supply matters a lot, even in the depths of this recession, which is why the stimulus law was doomed to failure.

A few readers asserted that the teenage employment surge is a result of labor demand rather than supply. Fortunately, economics offers several tests of whether demand or supply is the dominant factor in the labor market.

First, the supply side of the problem obviously is related to school enrollment: population segments with more school enrollment during the academic year have a greater supply shift when summer arrives. So if supply were an important factor, we should see a larger summer job surge for groups with higher school enrollment rates.

The chart below confirms this hypothesis, using data from 1980-2007: the summer employment spike is a greater percentage for the younger teens, and those are exactly the age groups for whom school enrollment is highest. (The summer employment spike is measured by the log deviation of July’s value from the average of May and September values.)

In fact, there is essentially no employment spike for the 25-to-34 age group, and that group has hardly anyone in school. If summer labor demand were as great as my critics claim, summer ought to bring some extra employment for the 25-to-34 group too.

Summer does involve some demand shifts, but the unemployment data readily show that the summer supply increase dwarfs demand in the labor market for young workers. Figure 2 below displays unemployment spikes for the same age groups.

When school lets out, students storm into the job market and jobs are created for most of them. A few students spend some of the summer unemployed because students, and not their employers, are the ones who suddenly decided that summer is the time when they are available to work. That’s why the summer unemployment spike is positive — unemployment per capita for these groups is greater during the summer than during the academic year, especially for the groups with more school enrollment.

Not surprisingly, summer unemployment is higher than normal even for nonstudents, because many young people out of school compete in the labor market with students who are set free from school each summer.

The Keynesian claim that supply doesn’t matter in recession is quite radical and contradicted by the labor market’s seasonal variation. The sooner we can undo the supply-harming provisions in Obama-era legislation, the sooner our labor market can have a real recovery.

Sunday, August 15, 2010

Is This Recovery, or Not?

The BEA revised its consumer spending data for 2008 & 2009, and the revisions give good reason to be more pessimistic about this recovery.

However, I continue to believe that there will be a partial recovery, meaning that the ratio of employment to population will return (only) about half way to what it was before the recession. I think even the revised consumption data support this. Moreover, if there were never to be a recovery, even partial, then investment would not have fallen so much initially, and would not show the kind of recovery it shows now.

Separable Preferences, Review of My Forecasts

When, in early 2009, I began modeling this recession and the recovery, I considered whether my model should reflect the fact that non-work time and market consumption are substitutes. Professors Aguiar and Hurst have done a lot of work on this topic, showing convincingly that people cut their market spending when they retire from their jobs, because they have more time to do tasks like cooking and shopping, and because they no longer need work related expenses.

In theory, the same could be true when people temporarily(?) loose their jobs, as in this recession. However, Professor Hurst advised me that unemployed people do not use their spare time to replace market consumption expenditures to the degree that retired people do. For that reason, and for ease of computation, the model I constructed last year assumed separable preferences.

However, even if Aguiar and Hurst are correct about the time allocation of unemployed people (and those patterns have repeated themselves in this recession), it is clear that unemployed people do not make work related expenditures like working people do. So for now I have decided to consider a measure of consumption that excludes personal expenditures on transportation, in addition to the measured I had considered before, without making any changes to my model and the forecasts derived from it.

The figures below show the data (through mid-2010) and my forecast scenarios. Recall that I have always given most weight to the "partial recovery scenario" shown in green in each of the Figures.

When consumption is measured to include transportation, and includes the BEA's latest revisions (see the black circles in Figure 5c), it seems to conform to the no-recovery scenario! But, for the reasons cited above, that is a mismatch between the model and data. The model refers to a consumption drop that derives solely from a wealth effect, whereas I think that transportation spending also falls because that spending is associated with going to work.

The consumption series without transportation spending (shown as black triangles in Figure 5c) conforms more closely to the "partial recovery scenario." So that scenario continues to be the likely one, although with the BEA revision I now see some of the first suggestions that it might be a little bit too optimistic.

As shown in Figures 5b, 5d, and 5e, the partial recovery scenario continues to fit the labor usage data very well, and fits the investment data well during the past couple of quarters. The model fits the general productivity trend (Fig 5d), although not all of the quarter-to-quarter changes.

Thursday, August 12, 2010

Summer: Is it Demand or Supply?

A few readers have wondered whether the summer employment surge, especially for teens, reflects demand or supply.

Of course, to some degree the demand for teenage workers shifts during the summer. But the demand shift is less than the supply shift. To see this, you could look at the seasonal for wages or, as I did in my paper, look at the seasonal for teenage unemployment.

If demand were shifting more than supply, then teen unemployment would be low in the summer -- summer would be the easiest time for an eager teenager to find a job. If supply shifted more than demand, then teen unemployment would be high in the summer, especially early in the summer before the market had much time to absorb all of those students storming out of school, because each teen job searcher has so many other teens with whom to compete.

Stimulus Advocates Rewrite History

You can read here the remarkable claim that stimulus advocates HAVE been paying attention to supply, and have been saying, especially in 2009 and 2010, that better work incentives would increase employment.

If that were true, how are we supposed to understand these quotes (emphasis added)?
  • "Traditionally, many economists have been leery of prolonged unemployment benefits because they can reduce the incentive to seek work. But that should not be a concern now because jobs remain so scarce.” (Professor Larry Katz, as quoted by the NYT Aug 1, 2009).
  • "If you cut taxes on labor income, this expands labor supply — which puts downward pressure on wages and leads to expectations of deflation, which increases the real interest rate, which leads to lower output and employment. All of this only applies in a situation of zero interest rates, which wouldn’t be interesting except that that’s the situation we’re in." (Professor Paul Krugman, December 14, 2009)
  • "What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant." (Professor Paul Krugman, March 7, 2010).

Odd Niche Employment

This article at acknowledges that labor supply matters -- that people with weak work incentives will be "pickier" about job offers.

At the same time it quibbles with my work on teenagers' seasonal, claiming that summer jobs for teens are "odd niche employment."

It doing so, it has begged the question! From where do the "odd niches" come? Outer space? Is it just a coincidence that teens enjoy their odd niche at exactly the time they are available to work, rather than, say, March-May? Is it just a coincidence that the summertime niche is for teens, and not for, say, elderly people?

The odd niche for teens comes from their willingness to work! If other groups were willing to work -- willing to give up their spare time and effort to help a business produce more, and accept pay that was commensurate with their production -- then emplopyment niches would appear for them too!

[NOTE: none of this says that the labor market is functioning well -- I have written elsewhere that is is not -- just that labor supply still matters in the usual way, despite the presence of large labor market distortions.]

Recession Supply Debate

I have shown that there is a close theoretical relationship between crowding out (of government spending) and the quantity effects of supply. To recap,
  • the crowding out view of government spending says that supply is scarce in the aggregate: if you want more employment and output, factor rents have to adjust to induce suppliers to be willing to do the work that it takes to have a job and be productive. The higher factor rents created by public sector demand will reduce private sector factor demand.
  • by the same logic, a significant increase in labor supply should significantly increase employment and output, precisely because supply is scarce
  • Thus, if you think crowding out is unimportant, you must conclude that supply is not an important determinant of the aggregate quantities of employment and output.

My recent paper reviews this theory, and offers evidence from the 2008-9 recession that aggregate employment was impacted by supply. Yesterday, I updated part of that work: my work on the aggregate effects of seasonal supply shifts (thanks to NGM for the link and cliff notes!).

In doing this work, I have benefitted from discussions with Dr. Gauti Eggertsson at the FRB of NY, who believes that fiscal policy has no crowding out effect at times like this, when the economy is supposedly in a liquidity trap.

So you may be interested in our exchange to date (NOTE: our exchange is ongoing, and I expect that Dr. Eggertsson has some new points yet to make, or will help me better understand points he has already made).
  • Summer 2009: Dr. Eggertsson was working on his theory paper claiming that, in a liquidity trap, the economy would paradoxically react to MORE labor supply by having LESS employment. He told me about this in September when I visited FRBNY.
  • Summer 2009: Although not yet aware of Eggertsson's paradox, I was skeptical of even the more moderate view that "supply matters less during a recession." As soon as the July 2009 employment data was released, I ran my first test on the seasonally unadjusted employment series. It showed that labor supply does affect aggregate employment, and to about the same degree that it did before the recession.
  • Fall 2009: I learned about Dr. Eggertsson's Paradox of Toil paper, as well as Professor Woodford's paper claiming that crowding out effects might (in theory) disappear in a liquidity trap, so I began to collect the various Great Recession labor market events that might confirm or contradict their claims, and emailed some of my results to them (my paper was later distributed more widely by NBER).
  • May 2010: Dr. Eggertsson kindly wrote back, and pointed me to his new reply paper. In his view, empirical work that properly tests the aggregate effects of supply shifts in a liquidity-trapped economy could not only confirm or reject his particular model, but "pretty much any model that features nominal rigidities" (p. 2, emphasis in the original). So a lot is at stake here!
  • May 2010: With regard to my seasonal fluctuations test, Dr. Eggertsson said that a seasonal labor supply increase would not REDUCE employment (even while other sorts of labor supply shifts would), but would leave it UNCHANGED: compare Figures 1 and 2 in his reply paper, respectively.
  • July 2010: I write back to Dr. Eggertsson that his Figures 1 and 2 are hardly different in the sense that they BOTH say that the aggregate effects of supply are fundamentally different in a liquidity trap than they "normally" are. Figure 1 says that more labor supply reduces aggregate employment, Figure 2 says aggregate employment is unchanged; both of those are fundamentally different than my view that more labor supply INCREASES aggregate employment regardless of the state of the liquidity trap. The seasonal data support my view, and contradict both his Figure 1 and his Figure 2.
  • July 2010: I also wrote requesting guidance as to, in theory, which labor supply shifts, and which fiscal policy shifts, should be analyzed with his Figure 1, and which should be analyzed with his Figure 2. In any case, both versions of his theory are contradicted by the seasonal employment data
  • ... more to come.

Wednesday, August 11, 2010

The Seasonal Job Surge: 2010 Edition

Copyright, The New York Times Company

National employment has increased by three million since January, and the change tells us a lot about how the labor market operates.

The headline from Friday’s employment report was that employment was lower in July than in the previous month and has hardly recovered since the beginning of the year. That headline report does not refer to actual estimates of employed persons, but rather to seasonally adjusted estimates.

The fact is that national employment was two million to three million higher in July than it was six months before (employment estimates vary somewhat between the business surveys and the household survey).

If previous seasonal patterns continue, much of that increase is expected to reverse itself by January. So, at first glance, there is no reason to get excited about the actual two million to three million increase.

But it’s big news that the seasonal employment cycle continues to operate as normal. The cycle is, of course, the outcome of seasonal fluctuations in supply and demand, and Keynesian economists insist that supply and demand are not operating normally since the recession began and that the economy has been caught in a “liquidity trap.”

Keynesian economists claim that labor supply — the willingness of people to work — doesn’t matter right now (or even that a more willing work force would reduce employment), which is why they advocate government stimuli that increase spending even while they erode work incentives. As Paul Krugman put it: “What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant.”

My view is that the stimulus law is partly responsible for today’s low employment, precisely because so many of its components have eroded work incentives. That’s why it’s so important to know whether supply operates as normal.

If the Keynesians are right, then the fact that teenagers become more willing and available to work when school lets out would not, during the recession, increase employment (and might even decrease it — Keynesians are not yet clear whether they think that the seasonal supply cycle would have a paradoxical effect, or merely no effect).

The chart below tests the Keynesian claims by comparing the seasonal employment cycle across years. Each series is the ratio of teenage employment to the employment of people ages 20 to 24. The teenage group is the most affected by the academic year, because they have so many more members in school. The 20-24 group is used as a benchmark to reflect the general changes in employment, and its possibly specific effects on the types of jobs that would disproportionately employ people under age 25.

The summers of 2009 and 2010 are the depth of this recession; the recession was still pretty mild in the summer of 2008. The years 2006 and 2007 are before the recession.

All five of the years show a teenage employment spike in July. In fact, the July 2009 and July 2010 spikes are about the same size — 15 to 17 percent (relative to the previous May) — as the 18 percent average of the previous three years.

People can argue about whether supply effects are marginally smaller during a recession. But the seasonal cycle clearly shows that labor supply remains important and cannot be approximated as a nonfactor, or even a sharply diminished factor, in today’s employment fluctuations.

Friday, August 6, 2010

GDP revision changes everything

I have been forecasting a partial recovery based on BEA reports that consumption had fallen "only" 2-3 percent below trend during first two years of the recession (see this fig).

But the BEA has now significantly revised the national accounts for the past couple of years, and now report that consumption has fallen 3-4 percent below trend during the recession. The revised series is consistent with the view that the labor market will not even partially return to trend!

More to come on the implications of the revised NIPA data.

Major consumption revisions were
Food & nonalcoholic beverages consumed off-premises
Motor vehicle repair
Personal care & clothing services
Household maintenance services
Final consumption expenditures of nonprofits serving households

ADDED: my conclusions were later posted here

Wednesday, August 4, 2010

Eurosclerosis Comes to America

Copyright, The New York Times Company

Employers now have a surprising number of job openings available, despite the persistently high unemployment rate. Public policy may be to blame.

During many recessions, the unemployment rate rises while wages and job openings fall — telltale signs that people want jobs, but that employers are not hiring. The economy, however, has not followed that pattern since late 2008.

The chart below displays unemployment and job openings since September 2008. In about a year, the unemployment rate rose to 10 percent from about 6 percent and has not changed much since then. Job openings fell through mid-2009 but have largely recovered since then.

It is not the usual pattern of recessions for the unemployment rate to lag job openings so much. As Paul Krugman explains, the two series normally move together, with the unemployment rate falling as job openings rise.

But this recession has been unique in terms of the multitude of public policies that dull incentives to work and earn income. Best known are unemployment benefits, which are paid only to people who have not yet accepted a new job. But the mortgage modification programs, begun by the Bush administration and tweaked by the Obama administration, offer mortgage forgiveness to borrowers with low incomes while offering nothing to those with high incomes.

The new home-buyer tax credit, the enhanced food-stamp program and many other programs in President Obama’s stimulus bill are much the same: people without low incomes need not apply. People accepting jobs in this economy see their various safety-net benefits reduced or eliminated.

Payments to the unemployed are compassionate, and maybe even the best government reaction to a deep recession. But previous economic research has shown that this compassion has a cost: programs like these make it more difficult for employers to fill their job openings. It is no surprise that adopting a European safety net is giving us a European unemployment problem.