In this post I want to engage in a little thought experiment. Consider this chart:
This chart illustrates the total non-farm payrolls from 1960 to the present with a regression line based on the period 1960 to 1991 extended to the present. I strongly suspect that this illustrates the trends that, probably, the last three presidential administrations have assumed to be the natural state of affairs, the norm. Given these assumptions you would see the 1990s as over-performing the trend slightly, the Aughts under-performing the trend slightly, and the present under-performing the trend a lot.
But let’s look at another chart:
I’ve drawn a green line on the chart to approximate the regression line drawn on the first chart and a red line as a rather different regression line approximating the trend if, rather than using 1960 to 1991 as your baseline, 1940 to 1970 is used. That tells a very different story than the first chart: rather than reflecting an economy that is suddenly producing significantly fewer jobs than the regression line would suggest it reflects an economy that outperformed the trend over the period of the last thirty years and is now returning to trend.
I can see why we’d prefer the green regression line over the red one. If the red one (or anything that even vaguely approximates it) is correct the economy still has a lot more jobs than we might expect which suggests that it might also have a lot of jobs to shed. Cheery thought.
However, I can’t see any reason to believe the green regression is correct. What should total non-farm payrolls be? If there should be 140,000,000 non-farm jobs, doesn’t that mean that our two consecutive bubbles were irrelevant to job creation? That seems incredible to me.
But if the number of jobs we should have is more like 118,000,000 not only do we have more jobs to shed but current economic policy is on a snipe hunt.
It seems that strong economies run Employment-Population ratios in the 70’s. But, they do it with different fractions of public and private workforce.
http://en.wikipedia.org/wiki/Employment-to-population_ratio
Look to Denmark?
This has gotten a lot of attention recently. Sumner, Kling, Cowen and Rowe, among others have been parsing this out. We did not produce nearly the jobs expected in the last recovery, but maybe the expectations were wrong. I think the kicker is the unknown number of jobs going to undocumented workers.
Steve
Interesting. According to this page the US has less than 8% of employees in government jobs, while according to this page the Danes have 38%.
Is that the same economy that some economists like to name as “most free market economy on earth?†I think so.
I’m not actually saying “become Denmark,” but I don’t think it would hurt us to “be a little more Danish.” It’s too bad all the name-calling and base politics that stand in the way.
All we would need to do to become more like Denmark would be to become a small, homogeneous country that didn’t have a 1,500 mile land border with a country with a per capita income a quarter its own, convert 95% of the population to Lutheranism, and make three quarters of all physicians (the specialists) government employees (which probably goes some way to explaining the high level of government employment).
The Nordic countries in aggregate can do it, without being as small as Denmark.
Lord spare me the “we cannot be X because we have inconsequential Y’s.”
My favorite of all time was that we can’t commute by bicycle, because our country is 3000 miles across! Still priceless.
Societies are not menus from which features can be selected at will. They are complex systems dependent on physical geography, cultural history, commonality of experience, genetic heritage, values, world view, and thousands of other factors that interact in ways that are impossible to analyze.
Things are politically possible in Denmark that will never be possible here. What would it mean to be more like Denmark?
BTW, the aggregate population of the Scandinavian countries is less than that of Texas with considerably less diversity.
Well then hell, we’re trapped. This is obviously the one political-economic system open to us.
As an aside, here is a symptom of our disease:
We don’t want to be ‘socialist’ so we hold direct employment by government to 8%. But then, because we want more done, we contract with private companies to provide. Those companies lobby for more work at better margin, rinse, repeat.
We’d be “more Danish” for instance, if we were less psychotic about the Post Office. Or for that matter, if we’d never floated Freddy and Fannie as “private” but with Federal backing.
See also The Mortgage Crisis: US Versus Denmark
We can’t do the solution which is better and safer, because it is too commie, not because they are all a bunch of Lutherans.
You’re missing my point, jp. Denmark’s shared values and shared experience, exemplified by its population being overwhelmingly Lutheran, means that its population tends to have more uniform preferences and aversions than does ours.
Do you have any twins in your family? My youngest sisters are identical twins. Imagine having a friend that likes all the same things that you do, likes to do the same things that you do, gets tired when you get tired, has energy when you have energy, and shares a lifetime of experience with you. That’s an extreme version of the relationship that I’m talking about.
Is it any wonder that there are big segments of our population that just don’t trust other big segments? They’re just too different with differing life experiences.
What stands in our way, overwhelmingly, is our comic book politics.
Call it Nazis versus Commies, if you need to.
There are all sorts of good solutions that have been “piloted” in various countries, some heterogeneous and some not.
The point is we can’t touch them. Anyone who claims that is because of our “diversity” is committing a misdirection. We can’t touch them because we have great emotional-political walls in place.
Wait, did you like the French healthcare system?
We can’t do it because we drink less wine and bathe too often?
Nice piece on Norway. High taxes and the world’s highest rate of entrepreneurship. What keeps us from accomplishing a similar economy is not economics, but culture.
Steve
Part of our culture is an immune response to anything like “European socialism.” Even when, like those Danish mortgages, it is really just a well regulated market solution.
I heard it just this morning on TV. Obama was trying to make us like Europe, said the Republican. The recent vote was a repudiation of that.
So let’s go backing to f’ing things up our way.
John,
The 8% cited in your link specifically excludes jobs in education and health care. I don’t have the stats in front of me, but I would guess that after adding both those in the 8% figure would easily double.
Secondly, we have “privatized” a lot of government functions. I know, for example, several defense-related contractors who don’t do anything but government work. Technically, they may be “private sector” employees, but in reality they are paid through the government’s coffers. That is an effect of the competing interests in our culture that demands “limited government” while maintaining government services.
Also, Dave is right. The problem is that the US is a diverse country and there is no national consensus on a lot of these issues, hence we get compromises like privatization of government services. There are large portions of the population that have mutually exclusive preferences on a host of issues. The Europeans don’t have this problem because their populations were homogenized after WWII and they don’t have birthright citizenship so the population stays homogeneous. The idea that we can form a European-style national consensus is a nice fantasy, but it’s still a fantasy.
Needs alot more meat I’m afraid. Trend lines are fine for short term forecasting, but when trying to do what you are doing you need more explanation. You need to make a stab at answering why.
Nor is there any reason to think it is incorrect.
That is not sufficient. Note that the two trend lines deviate much earlier than our two recent bubbles. That is it looks like the growth in non-farm payrolls started to accelerate in the 1970s, maybe even further back to 1965. Why?
I don’t know what the reason is, but the idea that we have to return to the 1940-1970 trend line strikes me as just as unfounded as saying the 1960-2007 trend line is the norm. Or more concretely, the underlying data generating process is clearly not a trend plus random error term (trend stationary process).
So you are saying our economy since as early as 1965 has been one big bubble? I find that even more incredible.
That’s essentially the point I’m trying to make in this post. However, policy is rather clearly making the assumption that the green trend line is the actual trend.
And, no, I’m not assuming that the economy since 1965 has been one big bubble. I’m saying that a series of bubbles is a simpler explanation for what has been happening over the last 20 or so years than the explanation that appears to be the prevailing wisdom.
As I see it the prevailing wisdom has two challenges that it has yet to meet:
1) Why were so many apparently unneeded jobs retained by so many companies for so long?
2) Why hasn’t employment returned as in prior recoveries?
It’s like the Pythagorean model of the solar system. They need to introduce so many other factors that their explanations rapidly become tremendously complicated.
The alternative trend that I’ve suggested only has one question to answer: why is employment so much above the presumed trend? But there’s a ready answer: policy-induced bubbles.
You won’t surprise me by telling me what I know.
And, I’d say that’s why you’ve got your “culture” turned around.
We don’t have all those off book government-as-contractor games because we are “diverse.”
We have them because we have that immune response, and a real case of cognitive dissonance.
john,
We have the cognitive dissonance (at the national level) because we are diverse and also big. And I mean diverse in its literal meaning, not its PC meaning. Cognitive dissonance in policy what happens when policy tries to satisfying constituencies with mutually-exclusive goals. That mutual exclusivity is why we are unable to deal effectively with many problems on the national level and that’s a problem most Europeans don’t have.
Invoking pidly Nordic countries as policy models again are we? A sure sign of deperation.
Steve V is correct: the trend lines are based, or intended to project, over WAY too long a period.
Seems to me that we need to be talking about how to deal with globalization and technology/productivity spurts and their effect on US employment. Swedes, well, Swedish women, are nice to look at, but their policies aren’t going to be relevant to steel industry employment.
The key here is that we hand-wave, yes including invoking ‘diversity,’ because we don’t want to think coolly and rationally about what works … like that Danish Mortgage system.
john,
Cool rationality doesn’t mean much if the solution isn’t politically viable.
This is not new. This problem plagued Bush I and Bush II. This is the third recession with a protracted recovery in regards to the labor market. Why? I don’t know specifically. I have seen some research suggesting structural changes in the economy are now the primary reason, and that would strike me as even more true today. But is that the only reason? I don’t know.
But in looking at the graph I see sustained growth in the non-farm payroll that is higher than the red line from 1965 onwards. So while the last 20 years explains some of the discrepancy it doesn’t explain all of it. Case in point in 1990 the green trend line and historical data indicate non-farm payrolls around 105 million or so. The red line is around 10 million lower or more, 95 million. Where was the bubble that did that?
I thought it was all the fault of that Ptolemy guy. :p
But I know what you mean. I recall Greg Mankiw was skeptical of the rather robuts job numbers the Obama Administration came out and Krugman and DeLong went after him for it. Now Mankiw looks rather prescient while Krugman and DeLong haven’t been phased one little bit…in fact their solution is to double down. Doubling down on a losing streak strikes me as particularly foolish.
But then we are back to the sequence of bubbles. Not just in the last 20 years, but the last 45. Look at the 1980’s as well. Significantly above the green line. Why? A bubble? What bubble? The Japanese Asset bubble maybe? I’m skeptical of that. You’ll have to at least provide a rough sketch of the causal mechanism. I’m just not seeing enough bubbles out there to keep things going. If anything there have been periods that make this explanation even harder to believe. The oil crises in the mid to late seventies, the severe recession in the early 1980s. I’m just not convinced that the red line is the “true” line or that we need to shed that many more jobs.
Steve V, you idiot. You are not thinking coolly and rationally about the Danes. All answers to your questions can can surely be found there.
Its a wonder the entire world has not adopted the Danish model. Not enough cool and rational people I guess.
I don’t care either what percentage has been now…what I’m notice for now is lots of workers keep in working…working and working to survive with a salary that only fit to their everyday living sometimes have to skip meals to keep going. The point is cost of living keep on increasing but not the salary? Hayyzzz How, When, What the earth is going on?
From the Philippines
Imee
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“Cool rationality doesn’t mean much if the solution isn’t politically viable.”
Again, an explanation chasing its tail.
“Steve V, you idiot. You are not thinking coolly and rationally about the Danes. All answers to your questions can can surely be found there.”
Ah, a case in point.
I know a guy in Denmark. Well educated, had his own business giving bicycle tours to visiting bankers around the capital city. When the economy tanked his business, understandably, was shut down. Had a Hell of a time finding a job after that.
Granted anecdotal evidence, but I’m not impressed with links to Denmark in the slightest. Post hoc ergo propter hoc and all that. Especially when a careful reading of the Money Illusion indicates that Denmark is moving away from things like 38% of the employed being in government jobs.
I’m thinking if jp had a backbone, and an ounce of responsibility in his soul – having discovered the Danish promised land – he’d run for office and implement the Danish miracle. Can you imagine? The time is right. The solution is obvious. The world is dark. It would save us all. He’d be on Mt Rushmore.
I can just see it, 50 years from now a family of four, using one of their 25 weeks of paid vacation, prys themselves out of their 4×6 ft car, plugs into the electric car refueling station and looks up at Mt Rushmore. “Tell me, Tommy, what did your teachers tell you about this?” “Well, Dad, after 200+ years of pure capitalist hell we had President Obama, who saved us from endless Depression by bailing out GM and giving it to the unions. See his face? Then he spent billions on stimulus that saved the world, but never seemed to get unemployment below 9%.” “Really? 9%” “Yeah, but the teacher said it was George Bush’s fault. Anyway, my teacher told me, out of nowhere a non-politician – an “independant” (snicker) ran for president. And President Personna brought us the Danish model! Unemployment plummeted. There was no more business cycle. People lived in harmony, freely giving their income to the state – now 40% of the employed – while everyone sang koom-bay-ya.”
“But son, who are those other people on the mountain?” “Well, my teacher was a little unclear. Like, well, maybe there really wasn’t a Pres Personna, just a bunch of guys sit’n around the bar pontificating about perfect worlds and such. Never really did anything, just pontificated. But the talk was so cool the govt paid a bunch of guys to chisel all their faces in the mountain. They called it “stimulus.” “I don’t know, Dad. She got a little vague. But she retired at 50 with a huge pension, so that’s the last I saw of her………”