Thursday, November 27, 2014

Hopeless Unemployment

BERKELEY – However bad you think the global economy is today in terms of the business cycle, that is only one lens through which to view the world. In terms of global life expectancy, total world wealth, the overall level of technology, growth prospects in emerging economies, and global income distribution, things look rather good, while on still other dimensions – say, global warming or domestic income inequality and its effects on countries’ social solidarity – they look bad.

Even on the business-cycle dimension, conditions have been far worse in the past than they are today. Consider the Great Depression and the implications of market economies’ inability back then to recover on their own, owing to the burden of long-term unemployment.

But, while we are not at that point today, the Great Depression is no less relevant for us, because it is increasingly likely that long-term unemployment will become a similar impediment to recovery within the next two years.

At its nadir in the winter of 1933, the Great Depression was a form of collective insanity. Workers were idle because firms would not hire them; firms would not hire them because they saw no market for their output; and there was no market for output because workers had no incomes to spend.

By that point, a great deal of unemployment had become long-term unemployment, which had two consequences. First, the burden of economic dislocation was borne unequally. Because consumer prices fell faster than wages, the welfare of those who remained employed rose in the Great Depression. Overwhelmingly, those who became and remained unemployed suffered the most.

Second, reintegrating the unemployed even into a smoothly functioning market economy would prove to be very difficult. After all, how many employers would not prefer a fresh entrant into the labor force to someone who has been out of work for years? The simple fact that an economy had recently undergone a period of mass unemployment made it difficult to recover levels of growth and employment that are often attained as a matter of course.

Devalued exchange rates, moderate government budget deficits, and the passage of time all appeared to be equally ineffective remedies. Highly centralized and unionized labor markets, like Australia’s, did as poorly as decentralized and laissez-faire labor markets, like that of the United States, in dealing with long-term unemployment. Fascist solutions were equally unsuccessful, as in Italy, unless accompanied by rapid rearmament, as in Germany.

In the end, in the US, it was the approach of World War II and the associated demand for military goods that led private-sector employers to hire the long-term unemployed at wages they would accept. But, even today, economists can provide no clear explanation of why the private sector could not find ways to employ the long-term unemployed in the near-decade from the winter of 1933 to full war mobilization. The extent of persistent unemployment, despite different labor-market structures and national institutions, suggests that theories that pinpoint one key failure should be taken with a grain of salt.

At first, the long-term unemployed in the Great Depression searched eagerly and diligently for alternative sources of work. But, after six months or so passed without successful reemployment, they tended to become discouraged and distraught. After 12 months of continuous unemployment, the typical unemployed worker still searched for a job, but in a desultory fashion, without much hope. And, after two years of unemployment, the worker, accurately expecting to be at the end of every hiring queue, had lost hope and, for all practical purposes, left the labor market.

This was the pattern of the long-term unemployed in the Great Depression. It was also the pattern of the long-term unemployed in Western Europe at the end of the 1980s. And, in a year or two, it will be the pattern again for the long-term unemployed in the North Atlantic region.

I have been arguing for four years that our business-cycle problems call for more aggressively expansionary monetary and fiscal policies, and that our biggest problems would quickly melt away were such policies to be adopted. That is still true. But, over the next two years, barring a sudden and unexpected interruption of current trends, it will become less true.

The current balance of probabilities is that two years from now, the North Atlantic’s principal labor-market failures will not be demand-side market failures that could be easily remedied by more aggressive policies to boost economic activity and employment. Rather, they will be structural market failures of participation that are not amenable to any straightforward and easily implemented cure.

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    1. CommentedTooScaredToUse MyRealName

      It is the glorification of greed that is the structural problem.

      When the crash dried up demand from my top-20%-of-US-income home remodeling/repair customers, I turned to credit to cover my fixed business costs temporarily (I thought), conserving savings. The audacity of hope...

      Despite a pristine credit record since 1979, no business credit was extended. The only thing left was personal credit cards. As the stimulus bill kicked in, demand increased, but only for low-profit "must haves", not lucrative improvements.

      At the same time, reliable tenants lost their jobs and rents became sporadic. I could not call up adequate ruthlessness to kick them out summarily after years of timely payments. None were able to catch up fully before finding subsidized housing, these proud skilled tradesmen and teacher assistants and EMTs and LPNs. OK, so those losses were my own fault.

      Even so, I could've paid off the credit, maintaining my pristine credit record, and lived a reduced, but comfortable lifestyle. Instead, in early 2010 the TARP recipients reduced my credit lines to the amounts owed, lowering my FICO score. Based on that, they then tripled my interest rates, devastating cash flow.

      Now my savings is gone (pristine credit record intact so far). I haven't had needed health care since dropping insurance in late 2010, and I'm physically unable to perform enough work in a week to survive at the 27.7% of my former hourly rate my old customers are willing to pay while they take trips overseas and buy up beach houses. Oh, puleeze accept my sincere apologies for that little bit of resentment leaking out.

      The $100 more per work day that would fix my situation (and still be half the pre-crash price) is less than they spend nightly on dinner out (I know - I used to go to those places once in a while).

      So, to all the commenters here who love the free market and hate collectivism in all its forms, watch out when unemployed labor uses its forced leisure to exercise its market power. You can reap the harvest of your ruthlessness or share the harvest of your grateful kindness with the society that enabled your success.

      We don't have an economic problem. We have an ethics problem.

    2. CommentedMoritz G€d1g

      *And I always though that the marked did not need demand, but only supply and investment.* (What seems so obvious was not the general opinion in the last decade. All that was talked about was investment.)
      Now that economists have had that great insight, they might be close to finding that there needs to be a balance between investment and consume. Products with no demand might sell, but not at a profit and companies might invest, and thus create demand, but at some point they will have to show that those investments will pay-off.

    3. CommentedJames Thomas

      "I have been arguing for four years that our business-cycle problems call for more aggressively expansionary monetary and fiscal policies"

      The problem is not that monetary policy has been insufficiently aggressive, it is that expansionary policies in the post Glass-Steagall period are not having the desired effects. Commercial banks no longer need to make traditional loans in order to earn money - now there are quicker avenues. ZLB funds simply improve bank incomes, they do not move capital into the market as they once did.

    4. CommentedMarc Sargen

      Our monetary & fiscal policies have been expansionary. The biggest question is if an expansionary policy will still be effective.
      Now we have a new cycle. Governments spend to spur the economy. Businesses worried about government debt & taxes don't invest or hire. The economy stagnates prompting calls for more government spending.

    5. CommentedLudwig van den Hauwe

      I can see that the business cycle perspective is only one lens through which one can look at these matters but one supposition of the business cycle lens seems to be (to me at least) that with the disappearance of the business cycle a source of at least some of the unemployment would disappear too... This being said the Great Depression episode goes on to present some interesting puzzles to economists. The "aggregate demand puzzle" is usually thought to have been solved by the gold standard theory: aggregate demand was depressed by a largely unplanned monetary contraction, which was transmitted around the world by the gold standard. But what were the relevant differences between the classical and interwar gold standards that support the case against the gold standard as the source of deflation and depression? And the gold standard theory still leaves unsolved the corresponding "aggregate supply puzzle". Slowly adjusting nominal wages apparently helped propagate monetary shocks in the Depression, but why did wages not adjust more quickly in the interwar period?

    6. CommentedAvraam Dectis

      One of the things that characterized our experiences during the Great Depression was the creation of new monetary and fiscal tools to deal with the economic problems.

      There does not seem to be an equivalent search today. Perhaps we should start considering new tools.

      One new tool that would work in many different situations, is CBD ( Central Bank Dividends ).

      CBD starts with the acknowledgement that the true owners of a Central Bank are the citizens and then proceeds to effectively pay them a dividend on their asset of ownership.

      In the USA, there would be many ways to implement a CBD, but since we see so much weakness at the state and local level, it could be done like this:

      The FED declares a 10,000 dollar CBD. Thsi would cause the following:

      1) Each state would have an account opened at the FED that would equal the number of citizens in that state times 10,000.

      2) Each state would be allowed to draw upon those funds to pay down debts or fund operations. In different situations, such as those found in teh euro zone, you would want to limit the funds to paying outstanding debt.

      3) If inflation were to rise, further access to the funds would be denied, however each state would be allowed access to the highest percentage of the fund that any state used, to be fair.

      CBD can only be used in highly indebted, recessionary and low inflation environments. Objections of monetization are not valid here as long as inflation is kept low.

      This is a way for a Central Bank to have a direct effect upon an economy when there is no functioning central government , as the euro zone lacks by definition and the USA lacks by practice.

      Thank you.

      Avraam J. Dectis

        CommentedMoritz G€d1g

        Isn't that basically what is practiced in many countries? The FED being a private bank is rather scandalous. Any CB should pay it's earnings to the federal government.

        CommentedAvraam Dectis


        Allow me to add that a 1000 dollar CBD would be more appropriate, since that would be about a third of a trillion dollars.


    7. CommentedArup Biswas

      When the market is in a economic depression-like situations, as in 1933 or 2008, no amount of tax breaks will motivate the private businesses to use the money to create jobs. Why should they? What would they do by manufacturing excess goods and services, if people do not have money to pay for it? Deficit spending by government is like a starter for the failing car, it boosts the economy in the short term, by giving money in the hands of the people, so that they can buy the goods and services from the private enterprises which leads to a positive feedback cycle. Once the economy goes back to the upward ramp, government can disengage. This is the guts of Keynesian economic principle, that has been proven correct innumerable times including the great depression. So, why does the market fanatics find it so hard to accept? Come back to earth, people.

        CommentedMark Pitts

        Tax cuts are just as Keysian as government spending. The difference is that tax payers rather than government employees get to decide how to spend the money.

        Earlier commentators are correct. The gov't almost never disengages. It's spend like madmen in bad times (to stimulate the economy), and spend like madmen in good times (because times are good and we can afford it). This is especially true when you look at total gov't spending which adds state and local spending to federal spending.

        CommentedGary Marshall

        Hello Zlati,

        Hasn't much grown? Government expenditures in the US are running far higher than they were about 4 years ago. US Government expenditures are running at about 25% of GDP. Expenditures in Health and Education are exploding. With Obamacare, Health will grow by leaps.

        Throw in state and municipal, and everything looks that much worse.

        If the US is the darling of small government advocates, then God help us all.


        CommentedZlati Petrov

        Gary, I don't know whether it's so obvious that governments never disengage.

        According to some measures at least the US government hasn't much grown.

        The ratio of All Government Employees to Total Nonfarm Employees rose to 19.5% in 1970, but then, instead of rising and rising, fell steadily to 15.5% in 2000. Right now it's at 16.5%.

        Current expenditures by the Federal government has also been basically steady relative to GDP.

        Of course, some of these data are specious. Government expenditures exclude transfers, implicit and off-balance sheet commitments, underfunded liabilities, etc.

        But the point is that not all governments grow to take over the economy and the US government is one example of a relatively tame sovereign.

        CommentedGary Marshall

        Hello Arup,

        Doesn't offering tax cuts or private businesses make investments more profitable? If the corporate tax rate is 50% and a business investment will earn 7% on invested capital while the cost is 4%, would a business make such an investment? How about if the tax rate was reduced to 25%.

        Do tax cuts not put money into the hands of people so that they are more able to save, invest, consume, and retire debt?

        Government's never disengage. Their take and spending just rises forever. I guess you missed the 20th century.

        Keynesian economics certainly did a number during the 60s and 70s. We have never seen 20% mortgage rates and never expect to again, unless one lived in Zimbabwe.


        CommentedZlati Petrov

        I think at least some do not accept it because of (1) skepticism towards the extent to which people actually consume out of current income vs. permanent income and (2) because government spending via borrowing would reduce future income via taxes (this is related to (1) in a fairly obvious way I guess).

        Then of course we have all the more unique considerations of the present, including hysterisis, the decline in collateralizable assets (which the gov't can alleviate by selling more Treasuries, ceteris paribus, although I still don't at all understand how this would work in theory), the liquidity trap and all the other factors that change the arithmetic in ways I haven't yet fully understood.

    8. CommentedGary Marshall

      Hello Mr. De long,

      Still playing the discordant and futile Keynesian fiddle. More big government spending programs, more debt, far greater government participation in the economy, higher taxes, more debt. And the result is just one failure after another, not only in the US, but throughout the western world and beyond.

      So you say that we must just accept the inevitable. Things will not improve until they improve. If Keynesian economics furnishes no answer, then nothing else will. Keynesian economics, your repulsive little child, can do no wrong.

      How about a different approach. How about government no longer implement programs that commandeer large sums of money, large amounts of labour, resources, and materials, for no purpose whatsoever. Why squander all these precious elements of production to produce goods that none want?

      How about government put money into the hands of those that know how to hire, those that know how to produce, those that know what to produce for the benefit of all. The means is a tax cut or perhaps a relaxation of impossible regulatory standards.

      Now I know you and your kind are philosophically opposed to government not being the saviour of those embroiled in economic turmoil. I know how difficult it is for you to concede failure in your Keynesian remedies. I know how petulant and childish such people as yourself become when forced to own to a possibility of having blundered.

      But perhaps you should set aside your inveterate and erroneous beliefs so that better ideas may be entertained and embraced. Can you do that for us? So that many of those unfortunate unemployed and struggling people need not suffer any longer for your intellectual arrogance.

      Why crucify those people because you are not man enough to admit a small error in sense and reasoning?


        CommentedGary Marshall

        Hello Ryan,

        So you argue that Reagan or the supply-siders are actually Keynesians. So be it.

        Then why is it that all of these so called European governments have chosen to ignore one of the main tenets of the Keynesian prescription? Why is it that all these so called economics thinkers advocate only for big government expenditures to amend receding economies?

        There is a shortage of labour. You see the government with its great and glorious stimulus projects and its projects of the past have done everything they can to keep people out of the meaningful labour markets. All sorts of special unemployment or idle employment programs funded by the taxpayer emerged over the years to limit the labour supply.

        This is in keeping with socialist doctrine. The more people paid to remain idle, the more people employed to do roughly the same by the government, the less people there are to produce the goods that all need and must buy, and the less people there are to fund this malignant and invariably expanding monstrosity of government.

        Now we see why Europe is nearing the edge of that steep financial cliff. Government with its meager productive contributions has grown to such a size that it has driven out a large fraction of those wishing to add to a needed aggregate supply.

        So government now creates all this money and hands it to people for work of little or no value. Those people then head out into the retail markets to compete for those needed goods of energy and food produced by a handful of people gainfully employed and properly rewarded. Too much money chasing too few goods. Aka, inflation.

        The reason that so few firms are hiring at this time is because the government has commandeered immense amounts of labour, material, resources to produce so little. So the costs in attempting to add to aggregate supply are excessive. The most profitable route is for firms to just raise prices. And how they have raised prices.

        It is not a shortage of demand. Its a shortage of supply. And the higher government's participation in an economy, the lower the aggregate supply of needed goods and services.

        Now on the monetary front, that dunce Bernanke has added greatly to bank reserves artificially driving the supply of funds to incredible heights at a time when so few are needed. With great supply and little demand, is it any wonder that borrowing rates are set artificially low. And when it turns, the Fed will be forced to sell bonds into a market of rising rates, sending them ever so much higher.

        Now the funds the Fed used to greatly increase those reserves are precarious investments. The Fed has purchased Treasuries at their near maximum price. any selling pressure will see those prices decline rapidly leaving the Fed with enormous losses, and doubtless seeking a bailout.

        There will be no recovery until the Fed has removed these artificially inflated reserves. Its the Japan disease of which we are now in our 4th year.

        The proper Keynesian prescription is to put money into the hands of those who know how to produce the goods sought in the market place. Those who know how to invest, save, retire debt, and consume.

        The highest corporate tax rate in the world is not conducive to such an aim. Needless and frustrating regulations that stifle the means of production are not conducive to such an aim.

        Follow Reagan's Keynesian prescription, and how much better things will be. Follow present prescriptions for government stimulus and we shall again limit the means of valued production.

        You speak of government as an investor. Tell me what the costs of its investments and what are the benefits of its investments? Could not perhaps that money have earned better returns in the hands of those who earned it?


        Portrait of Ryan Shyu

        CommentedRyan Shyu

        Mr. Marshall,

        You suggest tax cuts as a possible remedy to the economy--it should be noted, that along with direct government spending, tax cuts are one of two canonical Keynesian fiscal stimulus policies. By putting money in the pockets of businesses and consumers, tax cuts increase demand.

        Perhaps, instead, you were emphasizing the role of tax cuts in either incentivizing work effort or investment. It does not seem at present, however, that there is a shortage of labor supply--rather, it is firms who are not hiring. And even if business taxes were eliminated--and, for that matter, regulations were relaxed--firms will not invest or expand in a depressed economy.

        With regard to your point about wasteful government: It is true that in normal times government spending crowds out the activity of the private sector. However, these times are not normal. In particular, the US economy is stuck in a liquidity trap. This means that at present the Fed Funds rate has been pushed as low as possible—to effectively zero—and that the rate would need to be lower to motivate investors to use the excess savings in the economy (the Fed itself estimates that the market-clearing Fed Funds rate would be negative). The under-use of savings has led to a shortfall in demand, which in turn is depressing the economy. In such conditions, there is a strong case for the government to act as an investor of last resort, as such actions will cause no crowding-out of private sector activity and indeed will increase overall demand.

    9. CommentedZsolt Hermann

      Unfortunately we cannot draw any conclusions or even hope from previous experiences, we are in a state humanity never experienced before.
      Until now our development was always upward, even if we had obstacles we could go around them, above them and continue our expansive evolution.
      What we did not realize before but increasingly see today, all along we have been building a bubble.
      Not only in financial terms, but our whole lifestyle has become a bubble without foundations.
      The whole economic model and its supporting structure that is driving not only the western societies but the whole of humanity is the excessive overproduction/over consumption model. In order to generate unlimited profit a very sophisticated system was created that invents, builds desires, lacks, yearnings for goods we simply have no initial desire or need for. They are all unnatural, useless and many times harmful.
      But the very clever marketing machinery and on top of it the pressure of the society forces people to keep going, chasing these artificially generated desires and pleasures, gradually making them complete slaves to the system at all levels. We are truly in a Matrix we ourselves built and became slaves to.
      The problem is that since this whole approach is unnatural, and unsustainable sooner or later we had to reach the ceiling, and we have reached it now, or around 2007.
      Now this whole structure started self consuming, self destructing, and this process will speed up as time goes along. This is what the global "crisis" or more precisely system failure is all about.
      Today's unemployment is a very small fragment of the true unemployment that will come as a result of all the unnecessary production collapsing, most probably in the region of billions, since according to certain estimates 10-15% of human population can easily provide the true, natural and comfortable necessities for the whole of humanity.
      We simply cannot ignore the facts about our failed system any longer. Our civilization has outlived itself, we have to move on.
      Only by fully understanding our situation, our present and future conditions, our capabilities and our role within this vast natural, global and interconnected system can we start the transition to a new human system, and shorten the intermediary stage, and make it less painful.

    10. CommentedA. T.

      Seems the problem is that everyone has some non-trivial amounts of labour and needs/demand under their personal, no-coordination-necessary control, but that de facto control over the tools necessary (in the modern economy) to transform labour into a fulfilment of needs is highly centralised. A greater degree of self-sufficiency would allow people to employ themselves for their own needs, or to flexibly move from larger, more far-reaching organisations to smaller, more local ones whenever the global economy hits a wall. With the centralisation we have, on the other hand, the natural response for the tool-controllers during tough times is to hoard, rather than to share (in a variation of tragedy of the commons), and we see exactly the outcomes this article describes.

    11. CommentedLuke Ho-Hyung Lee

      People need Hope. Where is Hope? Please also see this article: “Job Creation in the Modern Information Age”

    12. CommentedProcyon Mukherjee

      Expansionary monetary policy and / or fiscal policy in times like this (when prices and wage growth have stumbled) look like obvious prescriptions that have worked in too short a time frame, hardly a cure for the deeper malaise, which is more structural-long term unwinding of excessive credit on one hand and associated leverage. Products of finance that could support a frenzy of activities around housing or commodities have far fewer options to ride on, even there is limit to what stock markets can absorb, given that overall growth in U.S. is tending towards 1.5%, EU towards 0.5% and the rest of the world towards 3%. With higher easing, the velocity of money has come down in recent times and liquidity preference has taken the shine off fancy products on the block; the incentives for fixed asset investments have evaporated in a big way in the developed world while the emerging markets have their own woes around inflation and deficits.

      Cannot agree more that there are no easy cures to the general malaise as this.

      Procyon Mukherjee