Imagine my disappointment on reading a post titled “How big is the output gap?” from economist Mike Bryan of th Atlanta Fed that his answer is “Not as low as zero and not as high as $1 trillion” (the straight line projection of GDP growth from 2005 through 2007 illustrated here).
He’s right. It is an important question and I wish at the very least he had offered an opinion as to whether it’s closer to zero or $1 trillion. I guess that’s what a PhD in economics is good for.
As I have suggested I think the output gap is much closer to zero than it is to $1 trillion, that Keynesian polices intended to close the gap between present output and the non-existent additional $1 trillion are in vain, and the real problem we should be trying to solve is to make GDP grow faster. As I have also suggested I think the path to faster GDP growth lies through producing a lot more energy, reducing spending on healthcare and education without reducing the actual amounts of healthcare and education produced, sharply reducing the size of the financial sector, and rationalizing our immigration and trade policies. Just to name a few impossible dreams.
However, he does ask an interesting question. If the output gap is small, why hasn’t a restructuring of the economy occurred? I have two answers to that question. First, the problems we’re experiencing did not start in 2007 but go back much farther. This isn’t the dream (or nightmare, I guess). 1996 through 2006 were the dream. This is the reality. The reason we had so much employment during that period was bubbles. Imaginary production.
My second answer is that policy since 2007 has almost entirely been devoted to preventing the restructuring that should have taken place. With trillions spent on behalf of maintaining an impossible status quo it would be surprising if restructuring had taken place. Financial sector bailouts. Auto industry bailouts. Block grants to states to allow them to keep their impossible compensation schemes for public employees intact. Maintaining unemployment benefits which nearly everyone agrees reduces employment by something between 1% and 5%. Just where in that range is a subject of bitter argument.
Okay, if UE benefits are suppressing employment, why aren’t the people on the back end of benefits getting jobs? That ain’t happening, which makes me think the whole theory is bunkum. Instead, we have had UE drop by three percentage points or so because people are dropping out of the workforce.
Or is the theory that if people didn’t have UE benefits they’d just give up and drop out of the workforce sooner, thus making life easier for the
bloddsuckerspolicy makers?Just to be clear about my own opinion on this subject, I think that unemployment benefits are a factor in unemployment but a very minor one. Said another way, I would be very surprised if there weren’t some people somewhere who didn’t decide that it made more financial sense for them to continue to draw benefits as long as they could rather than take a job they don’t like doing something they don’t want to do in a place they don’t want to go.
In answer to your question I think it’s clear that a substantial fraction of those who are at “the back end” are going on disability.
“Maintaining unemployment benefits which nearly everyone agrees reduces employment by something between 1% and 5%. Just where in that range is a subject of bitter argument.”
I dont think so. Numbers much above 1% generally seem to come from European studies. Since they provide higher levels of compensation over a longer period, it makes some sense. Studies done here in the US, looking at times of high unemployment are generally pretty close to 1%, and often lower. Older Barro, being influenced by older studies puts the effects as high as 2.7%. Younger Barro, looking at newer studies, puts the effect closer to 0.4%.
http://marginalrevolution.com/marginalrevolution/2010/08/barro-v-barro.html
Steve
In answer to your question I think it’s clear that a substantial fraction of those who are at “the back end†are going on disability.
Yes, and many are doing so because they are desperate. UE paid me less than a quarter of what I had been making, and I was at the max of UE benefits in Florida. I don’t think many people are thrilled with making a small fraction of what they used to make.
@Dave Schuler
You have an output gap when resources are left idle, and idle resourcs are a product of insufficient aggregate demand.
I’m thinking your definition may differ; can you articulate it, or is your thinking on this in a conceptual stage? I mean that question literally, not in any pejorative or sarcastic sense.
I do like this understatement by Dennis Lockhart in your link:
“”I think the output gap—the amount of slack in the economy—is neither as sizeable as the high-end estimates, nor is it zero. If there were no slack at all, 8.2 percent unemployment would represent full employment. If this were so, the economy would have undergone profound structural change over the last five years.”
If this were so then the economy underwent profound structural changes in two consecutive quarters of 2008, never mind five years. That is exactly why the evidence is against current unemployment being primarily stuctural. Does anyone really believe that in a six-month period employers decided their workers skills no longer matched their needs and fired 14 million of them?
Not so much conceptual as difficult to articulate.
“Output gap” isn’t measured in houses. It’s measured in dollars. If the value of the actual output goes down, the value of the factors that went into creating that output is completely dependent on their ability to be transferred to other purposes. Otherwise their utility is simply gone. The people are there but their utility isn’t. I think that’s what Tyler Cowen means when he talks about “zero marginal productivity”. That’s one component.
Many of the employees who lost their jobs were engaged in indirect production. They were creating institutional capital. When organizations feel plush, they can devote an increasing level of resources to institutional capital. That’s what happened from 1996 to 2006.
But the basis on which that happened was illusory. From 2008 to 2010 many companies, particularly large ones, hunkered down in survival mode (incorrectly, I think, but that’s another subject). They downsized. The need for institutional capital declined, the predisposition to create institutional capital declined. That’s another.
No, because the change didn’t occur over six months but over 20 years. We didn’t notice because we were in a dream.
@Dave Schuler
“No, because the change didn’t occur over six months but over 20 years. We didn’t notice because we were in a dream.”
I don’t think we’re really saying different things.
There’s no “proper” path for what goods or services are emphasized in an economy, no set course given to us from perfectly efficient markets or government policies which give us optimum value and allocation of capital and labor. There’s demand set by consumers and firms. The economy will reshape itself to meet whatever is being demanded by spending flows, as we saw during a massive credit bubble which emphasized housing offer everything else. Spending was targeted at that market and it responded, the problem was the spending didn’t introduce real financial assets: the money supply expanded with demand for mortgages and contracted when the bill came due. When the spending could no longer be supported, demand collapsed and firms logically responded to dropping sales and rising inventories, to uncertainty of what to expect, by laying off surplus labor.
Where we may disagree is that I accept MMT tells us there must be sufficient dollars in our economy to satisfy the desire to save, replace losses to our trade deficits, allow payment of tax liabilities, and then have enough left over to purchase all available goods and services. The dollars are in this view only “tokens” for facilitation of these economic exchanges and value lay in the real resources exchanged. Within this framework the primary explanation for our current economic situation is that government has not provided sufficent tokens to sustain healthy activity in the private sector and this has resulted in an output gap as businesses and consumers cannot purchase all those resources. MMT would argue that we can either provide more tokens to the non-government sector until it drives toward full employment, or purchase the labor of the unemployed directly as a jobs guarantee until such time as businesses see fit to hire them from government service.
Am I making sense? Sometimes I’m not sure whether I’m communicating very effectively.
I just hit the submit on a lengthy reply that didn’t appear and am too lazy to retype it. I have decided the iPad is a sub-optimal platform for blog commenting and will alter my habits accordingly.
Now I see the comment. Yes, I’m done with the iPad for this.
I have decided the iPad is a sub-optimal platform for blog commenting and will alter my habits accordingly.
My experience as well. iPad is good for traveling light, but ain’t all it’s cracked up to be.
I understand what you’re saying. The additional wrinkle I would add to my model is that I think that in an environment of international trade it is possible to produce circumstances under which Country A has inadequate ability to stimulate domestic demand regardless of how much money is in the system. Putting more money into the system merely induces increased production in Country B.
“Does anyone really believe that in a six-month period employers decided their workers skills no longer matched their needs and fired 14 million of them?”
The other side of this argument is that many people claim these folks all suddenly became slackers. Why would that happen? It looks to me like people were willing to work when the jobs were available, even if they were bubble jobs. Building houses with play money is still building houses.
Steve
Steve
I definitely do not believe that people became slackers. In fact, I think that people were working like crazy. But a lot of the work consisted of attending meetings, drafting memos, and writing reports. Then there was scheduling the meetings, drafting the minutes, and reporting on progress.
In the course of my work I frequently got to look into my clients’ books. I knew what they were selling, what they were buying, and what they were paying their employees. For a long time I saw wages go up and up and and staffs get ever larger and I couldn’t for the life of me figure out why. Increased sales didn’t support the increases. Difficulty in finding employees didn’t support the increases. Producing more actual outputs didn’t support the increases. Now I know. They were going up on smoke.
“Putting more money into the system merely induces increased production in Country B.”
This is where I and a few others, including the mighty Wynne Godley, split with MMT and its insistence that imports are a benefit and exports are a cost. Godley’s work demonstrated that increasing budget deficits increases trade deficits and drains the importing country’s productive capacity. We see the USD as a claim against 20% of the world’s economic production and think that defending that production is defense of the dollar and its value.
I gave up on the ipad as well. Annoying as hell and for some reason I can’t copy-paste into many comment forms.
I know a couple of people that stayed on unemployment benefits rather than take available work, but I can’t argue with their reasons – they had kids and it was financially better to collect unemployment, keep the kid/s at home and be an at-home Dad than it was to take the available jobs and pay for child care. My sense is that employment is getting squeezed at both ends – the cost of employment to employers has risen substantially and so has the cost to employees from child care and other expenses. Add in underwater mortgages and working spouses, which pin families geographically, it becomes much more difficult to go where the jobs are. At least that’s the sense I get from my very limited anecdotal data set.
Andy, I would advise anyone that was offered a job take it, unless they’re planning on not working again. (This is subject to physical location issues – if the job requires moving and they can’t move, then they can’t move.) It is MUCH easier to get a job when you’ve got one than to be LTUE.
A trio of stories yesterday showed that the employment squeeze is going to get worse instead of better, and that healthcare benefits are going to get a lot shakier going forward.
6 million will lose out on Medicaid expansion
Oops. So it won’t cover as many people as advertized. Mostly because of the SCOTUS ruling allowing states to opt-out of the Medicaid expansion.
CBO to employers: Obamacare has $4B more in taxes than expected
So the tax burden will go up, too. All that might not be so bad except for…
Nearly one in 10 employers to drop health coverage*
So fewer people will be covered than the most recent claims, it will cost more despite that, and anywhere for 9% to 33% of employers will consider dropping coverage depending on how onerous the new regs are.
Winning, bitchez!
So those of us that have spouses who are working with HC benefits are going to be even less likely to move for new work, employers will be offering less incentive to do so, and the additional tax burden means there will be pressure to not add heads anyway, especially not full-timers. And that’s all assuming the CBO estimates aren’t wildly optimistic….
Could they have done worse with PPACA if they had tried?
* That’s an annoying headline. How about “One in 11 ….”?
I was out driving around today and I heard that apparently the 6 million people dropped will save about $80 billion. Not sure over what time frame, and I haven’t found the story in a quick search. But the savings are from dropped coverage but the taxes are still supposed to go up?