Economics, Pethokoukis, U.S. Economy

Why the official 6.1% jobless rate might really underestimate labor market weakness


The official US unemployment rate is 6.1% vs. a Great Recession high of 10.0% and a low of 4.4% during the last expansion. So what do we make of that number? Although the jobless rate has fallen a lot, so has the labor force participation rate. The LFPR was 66% before the downturn, down to 62.8% today. So a much smaller share of adults are either employed or active jobseekers. If the LFPR were back at its prerecession level, the jobless rate would be 10.7%.

But that doesn’t mean the “real” jobless rate is nearly 11%. Economists generally agree that half of the roughly three percentage point decline in the LFPR decline is due to more retirees. America is getting older. That adjustment alone gives a jobless rate of 8.3%.

So the big question: what portion of that remaining 1-1/2-point drop in the LFPR is due to other structural factors and how much is due to a cyclically weak labor market that discourages jobseekers?

If the latter is a big factor, then (a) the official 6.1% jobless rate really understates the true weakness of the labor market, and (b) faster economic growth — say, from continued easy monetary policy — would draw people back into the labor market. But if it is the former, then we are getting close to full employment (somewhere, the Federal Reserve guesses, between 5.2% and 5.5%) and thus getting a more robust labor market requires dealing with longer-term structural changes in (a) the labor force participation of teenagers, young adults, and less-educated prime-age adults and (b) retirement and disability rates.

So short-term cyclical vs. long-term structural: which is it? A new note from Goldman Sachs gives some perspective on the state of the debate. It explains that a new Federal Reserve staff paper concludes that according to its preferred economic model, cyclical weakness was currently depressing the participation rate by just 1/4 of percentage point. In other words, almost all of the LFPR decline since 2007 is due to either demographic or structural factors.

But Goldman disagrees, and sees the cyclical “participation gap” as larger and more significant (bold is mine):

Last week, a group of six Fed staff economists–including William Wascher, a deputy director of the Division of Research and Statistics– published a new study on the labor force participation rate. The paper concludes that “much–but not all–of the decline in the labor force participation rate since 2007 is structural in nature.” Based on this assessment and other recent studies, a number of commentators have concluded that the participation debate has been settled in favor of the “structural” view. …

The new Fed staff paper concludes that cyclical weakness was depressing the participation rate in 2014Q2 by ¼pp in its preferred (cohort-based) model and up to 1pp in an alternative model based on state-level data. While the Fed paper provides a comprehensive study of the issues involved, we believe that its estimates of the participation gap are best interpreted to lie around the upper end of the ¼-1pp range cited in the study. … 

This interpretation would make the Fed staff’s estimates more consistent with other recent studies … While more recent estimates of the participation gap have tended to be somewhat smaller, the median estimate is roughly 1pp, broadly consistent with the upper end of the Fed staff paper’s summary range. While that estimate suggests that cyclical factors account for less than half of the decline in the participation rate, it would mean that the participation gap constitutes just over 1.5pp of the labor force (as opposed to the 16+ population), roughly double the Fed’s 0.75pp estimate of the U3 unemployment gap implied by the Summary of Economic Projections. The participation gap, therefore, is hardly a negligible factor in estimating remaining slack/ Or, in other words, we still have ways to go before hitting full employment, at least at a level permitted by the current structure of the US labor market. The “real unemployment” — if you buy the Goldman analysis — is probably about halfway between the 6.1% number and the 8.3% number, about 7.5% or so.

And, of course, this only concerns job quantity, not job quality. There are still too many part-time jobs as a share of total employment (see below) and too many of the middle-wage jobs lost during the Great Recession have been replaced by low-wage jobs.

091114jobs2Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


Here is a better idea than net neutrality: competition



From Time:

A group of popular websites that rely on speedy Internet service — including Netflix, Vimeo and Reddit — will launch an online protest Wednesday against controversial proposed changes to “net neutrality.” The coalition of companies, who call themselves Team Internet, will use the spinning “still loading” symbol on banners of protest against the world of frustratingly slow Internet they say could come about if the U.S. Federal Communications Commission (FCC) nixes net neutrality. Clicking on the banners will link to more information about net neutrality, the organizers say.

Rather than regulating the internet to lock in a “net neutral world” that does not exist and never existed — and in the process risk limiting new investment and innovation — better to promote more players and competition. As Marc Andreessen has put it:

Imagine there are five competitors to every home for broadband: telcos, cable, Google Fiber, mobile carriers and unlicensed spectrum. In that world, net neutrality is a much less central issue, because if you’ve got competition, if one of your providers started to screw with you, you’d just switch to another one of your providers.

And how to get that increased level of competition — and a faster internet? A new R Street Institute study has an idea:

Perhaps the ideal solution is being missed because it is so obvious. Reduce or repeal taxes, eliminate outdated regulations and bureaucracy, and broadband investment will increase. Competitors will be willing to enter a market against entrenched incumbents. Incumbents will raise investment.

Google Fiber makes a great case for revisiting the decades-old tax and regulatory structures that may have worked in the monopoly era, but are counterproductive now. To lure Google, cities are waiving long-cherished revenue mechanisms. At some level, they understand the economic gain from greater broadband exceeds the loss from these obsolete models.

But what’s good for Google is good for everyone—incumbent and newcomer alike. Furthermore, research shows that states and cities who took initiative to reform franchise fees, reduce taxes and streamline construction and permitting processes saw better outcomes in terms of broadband growth.

A multi-million dollar municipal system is not necessary for universal broadband. The private sector is well-positioned to do the job. All it needs is the right climate for investment. That includes a local government willing to do its best to work with prevailing market forces, not against them.


The crusade for more capital at US megabanks continues

 A 15% equity capital “cushion” allowed Wall Street banks to survive the Great Depression and would have done the same during the Great Recession. Anat Admati would like to see 20%- 30%. A new Fed rule would push capital ratios at least a bit closer to those levels. From the NYTimes:

A group of international regulators had already been planning to impose higher capital requirements on so-called globally significant banks. The capital ratio for the biggest banks in the world, includingJPMorgan Chase, was expected to be a minimum of 9.5 percent, compared with the 7 percent minimum for most banks.

But the Fed’s new rules could raise the minimum for some banks to 11.5 percent, according to a Federal Reserve official briefed on the matter. The banks that would be forced to adhere to the highest standard of 11.5 percent might not just be the biggest ones. Mr. Tarullo said that the Fed would look particularly carefully at the degree to which banks rely on short-term debt — a market that froze up in the last financial crisis.

That could put a heavier burden on Goldman Sachs and Morgan Stanley, firms that get more of their money from short-term funding. For both banks, a jump to a capital ratio of 11.5 percent would be a 3 percent increase from the levels that had been previously discussed. In Goldman’s case, that would mean increasing its capital by about $17 billion over previous expectations — through selling stock, holding on to profits or cutting its business proportionately.

And some political analysis by Guggenheim analyst Jaret Seiberg:

This is not just regulatory posturing. The policy changes that Federal Reserve Gov. Tarullo previews could easily raise required capital levels for Goldman Sachs, Morgan Stanley, JP Morgan, Citigroup and Bank of America by 200 basis points or more. It also could force them to reduce their use of short-term wholesale funding, which would raise funding costs.

We believe this is part of the growing anti-mega bank sentiment that we have discussed in prior notes. It is why we continue to argue that the policy environment will favor the regional and community banks over the mega banks. It is also why we expect more discussion in the coming year of having the mega banks voluntarily break themselves up.

Economics, Monetary Policy, Pethokoukis

The case for the gold standard is really pretty awful

Image credit:Covilha's Flickr photostream  (CC BY 2.0)

Image credit:Covilha's Flickr photostream (CC BY 2.0)

“Re-adopting the gold standard in America,” argues a surprising e21 editorial, “could spur the economic powerhouses of the world to join, creating more stable markets and prosperity across the globe. Let us hope.”

Let us hope what, exactly?  “Let us hope” that the gold standard is re-adopted? Unlikely, as even its proponents concede. “Let us hope” that re-adopting the gold standard would produce greater prosperity? Even more unlikely, if that’s possible. A new gold standard would risk deflation and depression.

For instance: imagine, writes economist Scott Sumner, a scenario where soaring Asian demand for gold raises the yellow metal’s purchasing power, “producing deflation in all countries that use gold as the asset in terms of which all prices are quoted.” With prices falling, demand would decline, unemployment would raise, and prices would fall further. At that point, fear of government abandoning the gold standard, Ramesh Ponnuru explains, might prompt gold hoarding, accelerating the deflationary spiral. As Tyler Cowen has put it, “Why put your economy at the mercy of these essentially random forces?”

AEI economist John Makin offers another scenario:

Consider for a moment a thought experiment wherein the US government unilaterally decides to fix the dollar price of gold at a level that implies lower inflation. Under the rules of the gold standard, that would imply setting the dollar price of gold at a level below the current world market price. But that would not work. At such a level, private gold buyers would purchase their gold from the United States and experience a windfall gain. The US gold stock would fall, and the US money supply would fall as well, given a rigid gold standard rule. That kind of a deflationary shock would be disastrous in the current environment …

There is good reason why in a 2012 University of Chicago business school poll of 40 top economists — academics on the left, center, and right —  found not a single one who agreed with this statement: “If the US replaced its discretionary monetary policy regime with a gold standard, defining a “dollar” as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American.” In fact, 66% “strongly disagreed” with the statement vs. 34% who just “disagreed.”

Given the weight of evidence against the wisdom of returning to a gold standard, I would guess that for most people the idea merely reflects ideological nostalgia for the pre-New Deal period. A bridge back to the 19th century. In a review of “Money, Gold, and History,” by Lewis Lehrman, economist David Beckworth offers a path forward:

The supply of money is created mostly by banks and other financial firms. The demand for money is shaped by the needs of households and firms. Both are difficult to measure and individually beyond the direct control of the Federal Reserve. The product of the two, however, can be meaningfully influenced by the central bank. It is called total dollar spending, and its stabilization should be the objective of monetary policy. The Federal Reserve can do this by managing expectations of future total dollar- spending growth.

Here’s how: The Federal Reserve credibly commits to doing whatever it takes to keep total dollar spending growing at a constant rate over time. The public would come to understand that, if total dollar spending went above or below this target growth rate, the Fed would correct it. This belief would become a self-fulfilling expectation, requiring minimal action by the central bank.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


What we’re reading today: September 10, 2014

Check out the top pieces we’re reading today on the economy, technology, education, and more.

1.) Manhattan Institute asks: are unions democratic?

2.) Government debt isn’t the problem—private debt is, argues Richard Vague in The Atlantic.

3.) At Education Next, Paul Peterson writes on what parents think about their public schools.

4.) Urban Institute looks at health insurance coverage for parents and children under the ACA in 2014.

5.) Jared Meyer outlines what Washington can learn from Apple in his e21 piece.

6.) From NBER: the changing benefits of early work experience.

7.) At NYTimes, Teresa Tritch discusses how unemployment insurance helps prevent foreclosures.

8.) Over at Brookings, William Gale and Andrew Samwick look at the effects of income tax changes on economic growth.

9.) In the Harvard Business Review, Roger Martin looks at the rise (and likely fall) of the talent economy.

10.) For the latest on robots, check out the humanoid robot Nao learning to drive its own car, and the nimble-wheeled robot working in MN.

11.) How long can the economy absorb excessive government spending? J.T. Young asks in his RCM article.

12.) Pew says the global public is downbeat about the economy. Here’s one of their charts:

Pew: Global public wary of economy's future

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.


Here is what conservative reform is not. Really, not at all

Lobbyist John Feehery, a former spokesman for former House Speaker Dennis Hastert, gives his interpretation of the current center-right debate on economic policy. One side, he writes in The Wall Street Journal, are the “evangelical libertarians” who believe “the free market has been tainted by political corruption. Crony capitalism can be defeated only by greatly reducing the size and scope of government: Get rid of the Export-Import Bank. Don’t extend terrorism risk insurance. End Fannie and Freddie. Get rid of corporate welfare of all kinds.”

Then, Feehery continues, there are the “Republican reformers”  who “don’t share the evangelical libertarians’ zeal in ending all government programs, but they see the need for reforms: Could the Ex-Im bank work better to protect domestic companies such as Delta? Sure. Could we ensure that taxpayers are not on the hook for a bailout of the GSEs without destroying the housing market? Certainly.The evangelical libertarians may have passion on their side, but politically speaking their position is far riskier.”

Now Feehery, it is clear, favors the “Republican reformer” approach. Unfortunately, people might confuse or conflate what he describes with the conservative reform movement, of which I consider myself part. A key part of conservative reform, in my view, is fighting crony capitalism and promoting free enterprise. Pro-market, not pro-business.

I wrote a whole chapter on this subject in “Room To Grow,” a compilation of conservative reform essays on everything from taxes to education to healthcare. Cronyism enlarges government, breeds corruption, and reduces economic growth by favoring politically connected incumbent firms (the kind who can hire pricey lobbyists) over startups. Cronyism is at the heart of what’s wrong with the American economy. Understanding that doesn’t make you some horrible libertarian caricature who wants to “eliminate government.” And, sorry, I really do want to get rid of corporate welfare of all kinds, whether they be special tax breaks, spending programs, regulations, or guarantees. Americans need a safety net, Corporate America does not. What’s “politically risky” about that position?

The debate, then, isn’t between evangelical libertarians and Republican reformers. It’s between those folks who understand Washington isn’t working and needs big, bold change — some of these folks are conservative reformers, others call themselves libertarian populists  – and those folks who are, really, kind of OK with Big Government as long as the status quo benefits them in some way.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

What we’re reading today: September 9, 2014

Pew: Federal minimum wage 1938-2013

Check out the top pieces we’re reading today on the economy, technology, education, and more.

1.) The Upshot rounds up the top colleges that enroll rich, middle class, and poor.

2.) From the St. Louis Fed: The Great Recession casts a long shadow on family finances.

3.) At the IMF blog, Era Dabla-Norris writes on why education policies matter for equality.

4.) Over at e21, Diana Furchtgott-Roth discusses the “coincidence” of CVS and tobacco.

5.) The New York Fed looks at why more renters aren’t becoming homeowners.

6.) Pew asks: who makes minimum wage?: “People at or below the federal minimum are”:

  • Disproportionately young: 50.4% are ages 16 to 24; 24% are teenagers (ages 16 to 19).
  • Disproportionately young: 50.4% are ages 16 to 24; 24% are teenagers (ages 16 to 19).
  • Mostly (77%) white; nearly half are white women.
  • Largely part-time workers (64% of the total).

7.) In his most recent WSJ article, Casey Mulligan writes on the myth of Obamacare’s affordability.

8.) Williamson Evers, in his latest at Education Next, talks about how the Common Core suppresses competitive federalism.

9.) Cato Unbound gives “the true story of how the patent bar captured a court and shrank the intellectual commons.”

10.) Christopher Einolf has a new blog at the Institute for Family Studies titled “Marriage and social capital: A generous or greedy institution?

11.) IEEE says that at the Mayo Clinic, IBM Watson takes charge of clinical trials.

12.) Americans don’t just work longer hours—they work stranger hours, according to this Quartz piece.

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.


Is the current job market recovery stronger than the one in the 1980s? C’mon

Reagan Foundation

Reagan Foundation

You can tease the data until they cry for their mothers, but you cannot plausibly make them declare that the jobs recovery after the 2007-2009 recession has been stronger than the rebound after the 1981-82 recession. But over at, Adam Hartung approvingly quotes some newsletter writer who attempts to make just this case:

President Reagan has long been considered the best modern economic President.  So we compared his performance dealing with the oil-induced recession of the 1980s with that of President Obama and his performance during this ‘Great Recession.’ As this unemployment chart shows, President Obama’s job creation kept unemployment from peaking at as high a level as President Reagan, and promoted people into the workforce faster than President Reagan. President Obama has achieved a 6.1% unemployment rate in his sixth year, fully one year faster than President Reagan did.  At this point in his presidency, President Reagan was still struggling with 7.1% unemployment, and he did not reach into the mid-low 6% range for another full year.  So, despite today’s number, the Obama administration has still done considerably better at job creating and reducing unemployment than did the Reagan administration.

If you think the jobless rate — despite all the current controversy about labor force participation and job quality — by itself reveals all one needs to know about the state of the US labor market, then your intellectually curiosity is easily sated. But even that aside, the comparison made above is silly. In the 68th month of the Obama presidency — the August job report is what we are looking at — the unemployment rate was 6.1% while 68 months into the Reagan presidency, the rate was 6.9%.

But the two presidents had recessions start at different points in their presidency. We are 54 months into the Obama jobs recovery and the jobless rate is down 3.9 percentage points from its peak. At 54 months into the Reagan recovery, the job rate was 6.2% (so about the same as today), down 4.6 points from its peak.

Just two more points: First, the current jobs recovery — as opposed to the official NBER recovery —  is 54 months long, during which 9.5 million jobs have been created. By contrast, 54 months into the 1980s recovery, 13.1 million jobs were created. (By the way, the adult civilian population today is 70 million higher than it was back then.) I think this actually ends the debate, but I will continue.

Second, during the Great Recession, the employment rate — the share of adults with a job — hit a low of 58.2%, down 4.7 percentage points from a precession level of 62.9%. It currently stands at 59.0%, up a mere 0.8 points from its low and still 3.9 points from its high. During the 1980s recession, the employment rate fell from 59.6% to a low of 57.1% and then rebounded to a new high of 60.7% by June 1977, the 54-month point of the jobs recovery.

Now I suppose you could try and make some relativistic argument keyed off the different natures of the two recessions. But in terms of raw, job-creating power, score one for the Gipper.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


This is a real debate on the left: Should school reform be about what’s best for kids or what’s best for incumbent teachers?

New York magazine writer Jonathan Chait offers some insight into how the left and Democratic Party see education reform:

Not long ago, I described the split within the Democratic Party as centering around “whether public services should be designed for the benefit of providers or consumers.” Some readers objected that that description, and fair enough — opponents of education reform certainly do argue that their policies would benefit children. But it is also demonstrably true that some of the opposition to education reform is driven by a belief that it unduly prioritizes educational results over the welfare of incumbent teachers.

One recent Washington Post column defended teacher tenure laws specifically as a means of preserving jobs for the black middle class. The author, Andre M. Perry, did a poor job of defending his thesis even on its own terms — he asserted that eliminating tenure laws leads to a reduction in black teachers without presenting any data to support the claim. …  More noteworthy is Perry’s frank admission that urban schools should not maintain a singular mission of educating children, but should balance that mission with providing jobs to adult employees …

The same premise comes through in a column by Justin Minkel, published in Valerie Strauss’s anti-education reform blog. Minkel argues, “We don’t need to swap out all the bad and mediocre teachers for better teachers, anymore than we should swap out our struggling students for more advanced students.”

If you believe schools should be designed solely to promote education, then this equivalence is bizarre: Getting a quality education is a universal right, while holding a teaching job is not. Why should we treat these conditions as equivalent? On the other hand, if you consider teachers and students to be stakeholders with equal rights, to be balanced about equally, then the anti-reform line makes obvious sense.

In a way, this is a familiar story to me. Just another version, really, of the innovator vs. incumbent battle that I write so much about. Except for the innovator to succeed — in this case that often means charter schools — they actually have to produce results: namely, better educated kids. Their interests are aligned. The incumbent merely wants the status quo that has benefited them so much. And without accountability, teacher-student interests are not aligned. Chait’s insights are a useful addendum to the NY Times magazine piece on the running battle between NYC Mayor Bill de Blasio and Eva Moskowitz, who runs Success Academy Charter Schools. Both are people of the left, but with very different views on education.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.