Fed Fail: labor force participation rate edition

America’s Workforce: The Mystery of the “Missing Millions” Deepens by John Cassdiy

The Labor Department’s participation-rate figures tell the story, but they don’t really convey what it means in human terms. For that, it’s useful to do a bit of back-of-the-envelope arithmetic and convert them into an estimate of the number of workers who have gone “missing” from the labor force, for whatever reason. Early last year, based on a report from the Congressional Budget Office, I did that exercise and came up with a figure of roughly six million, which isn’t much short of the entire population of the Dallas-Fort Worth metropolitan area. 

Based on the latest job figures, six million might even be an underestimate of the number of missing workers. In December, 2007, the participation rate was sixty-six per cent, more than three percentage points above the current figure of 62.7 per cent. If the rate had rebounded to its pre-recession level, there would now be roughly eight million more people in the labor force.

Steve Liesman Embarrasses Rick Santelli On CNBC

since crisis labor share redistributed to capital

Before crisis, it was going to high income workers.

Is Productivity Being Translated Into Pay Increases? by Dean Baker

...
I had made these points myself a few years back. My conclusion was that we were really looking at a story of upward redistribution from middle and lower income workers to those at the top, doctors, lawyers, and especially Wall Street types and CEOs. Distribution from wages to profits was not a big part of the picture. 

But that was back in 2007. The picture looks a bit different today. The graph below shows the labor share of net income in the corporate sector. This is a bit simpler than constructing productivity and pay data, but it should get at the same issue. I have pulled out depreciation and also indirect taxes, so the division is simply between labor income and capital income. I also show the share of labor compensation in after-tax income in the corporate sector.
...

In the data in the graph it certainly looks like we are seeing a redistribution from labor to capital at least in the years since the crash. For the last three years the labor share of before-tax income was lower that at any point hit in the 1980s and 1990s. The labor share of after-tax income is more than two percentage points lower than at any point in the 1980s and 1990s. That looks like a fairly serious redistribution.

We can throw in the usual qualifications about the data being erratic and cyclical, but it's pretty hard to find a way to make this redistribution disappear. It may prove to be the case that if the unemployment rate falls back to more normal levels then workers will get increased bargaining power and will be able to recapture more of the gains from productivity growth, but that is not happening now.

In the late 90s, Greenspan allowed unemployment to reach 4 percent as he was fighting international financial crises and the stock market bubbled. There is no structural decline because of techology or globalization or oil, etc. It's politics all the way down. The Great Clusterfuck wasn't planned in advance - it dealt the ideology of the system a body blow - but it was a crisis that wasn't wasted.

Why Is Ben Bernanke The Only Man in Washington Who Care About Jobs? by Timothy Noah

The Self-Destruction of the 1 Percent by Chrystia Freeland

Tim Cook Apologizes for Apple's Maps

A Political Football in the Classroom by A.O. Scott (review of "Won't Back Down")

The Inflation that Concerns the Fed Does Not First Affect Food and Energy Prices by Dean Baker

Fed Responds to a Grim Reality by Binyamin Appelbaum

... Under the leadership of Mr. Bernanke - with considerable prodding and support from a board almost entirely appointed by President Obama - the central bank has gradually concluded that it has a responsibility to act more forcefully, and, equally important, that it has the ability to spur job creation directly.  

Mitt Romney, Liquidationist by Krugman

How times have changed. Back in 2004, Greg Mankiw declared, in the Economic Report of the President, that

Aggressive monetary policy can reduce the depth of a recession.

But now, after the Fed has finally moved a bit in the direction of doing something about the Lesser Depression, Mitt Romney – supposedly advised by Mankiw among others – is outraged:

[T]he American economy doesn’t need more artificial and ineffective measures. We should be creating wealth, not printing dollars.

That word “artificial” caught my eye, because it’s the same word liquidationists used to denounce any efforts to fight the Great Depression with monetary policy. Schumpeter declared that

Any revival which is merely due to artificial stimulus leaves part of the work of depressions undone

Hayek similarly decried any recovery led by the “creation of artificial demand”.
Milton Friedman – who thought he had liberated conservatism from this kind of nonsense –must be spinning in his grave. 

The Romney/liquidationist view only makes sense if you believe that the problem with our economy lies on the supply side – that workers lack the incentive to work, or are stuck with the wrong skills, or something. And that’s just not what the evidence says; instead, it points overwhelmingly to an insufficient overall level of demand.*

When dealing with ordinary, garden-variety recessions, we deal with inadequate demand through conventional monetary policy, namely by cutting short-term interest rates. Until recently even Republicans were OK with this. 

Now we face a more severe slump, probably driven by deleveraging, in which even a zero rate isn’t low enough, so monetary policy has to work in unconventional ways – in particular, by changing expectations about future inflation, so as to reduce real interest rates. This is no more “artificial” than conventional monetary policy – harder, yes, but it’s still about trying to get the market rate aligned with the “natural” rate consistent with full employment. 

So where are Romney and his party coming from? Basically, they’ve thrown out 80 years of economic analysis and evidence because it doesn’t fit their ideological preconceptions, and they’re resorting to dubious metaphors – “sugar high” and all that – as a substitute for clear thinking. 

What you really have to wonder about is all the not-stupid economists who have aligned themselves with this guy and that crew. Probably they imagine that once the election is past sensible economics will return. But the odds are that they are wrong, and that they’re sacrificing their own credibility to put charlatans and cranks in the driver’s seat.

--------------------
* Mishmash Not

Props to Eddie Lazear; he’s a loyal Republican who’s been saying a lot of things I consider totally wrong lately, but his paper for Jackson Hole (pdf) is a professional, well-done piece that offers little aid and comfort to his political allies.

 

The New Normal

The Employment Situation by Krugman

Review of End This Depression Now! and 
The Price of Inequality: How Today’s Divided Society Endangers Our Future:

What Krugman & Stiglitz Can Tell Us by Jacob Hacker and Paul Pierson

Fed Fail Part XXIV (or opportunistic disinflation)

63 to 58 percent of the civilian population.

The Fed hasn't devalued too much so creditors retain the value of their claims. Deleveraging is done on the backs of the poor and working class, not split fairly between creditors and debtors.

Employers get a more pliant workforce with high unemployment and employees afraid to lose their jobs. However there has been downward nominal wage rigidity which probably has helped keep deflation at bay.

But news articles often report that people are taking new jobs at much lower pay levels.

The Age of Niallism: Ferguson and the Post-Fact World by Matthew O'Brien

lolwut?

Pregnant Woman Relieved To Learn Her Rape Was Illegitimate

Tampa Bay Gay Prostitutes Gearing Up For Flood Of Closeted Republicans

Republicans Condemn Akin's Comments As Blemish On Party's Otherwise Spotless Women's Rights Record

sums up the Republican Party of the 21st Century

commenter Joe Smith at DeLong's Grasping Reality with Both Invisible Hands: Fair, Balanced, and Reality-Based: A Semi-Daily Journal post on Yglesias on Paul Ryan:

MATTHEW YGLESIAS (2010): WHY WE SHOULD FEAR THAT PAUL RYAN TALKS TO JOHN COCHRANE…

Matthew Yglesias (2010):

Paul Ryan's Monetary Economics: Paul Ryan says that “monetary policy was always my first love” but he doesn’t seem to know very much about it: “There is nothing more insidious that a government can do to its people than to debase its currency,” Ryan said. Just as harmful, Ryan warns, is that the proliferation of newly printed dollars inevitably unleashes inflation and throws the economy out of kilter in other ways. “Inflation is a killer of wealth. It wipes out the middle class. It eviscerates the standard of living for people who have retired or are living on fixed incomes,” he said. “Name me a nation in history that has prospered by devaluing its currency.” [...]

So to sum up, right now inflation is running lower than it was in the 1990s and 2000s. What’s more, in the 1990s and 2000s it was running lower than it was in the 1980s. And what the Fed is trying to do is to bring inflation back not to the levels of the Ronald Reagan Era, but to the rate we enjoyed in the 1990s and 2000s. Maybe Ryan’s a madman rather than a hypocrite…

Joe Smith said... "Ryan was sharing $350.00 bottles of wine with Cochrane and a hedge fund manager."

Forget Paul Ryan's Budget: His Scariest Idea Is About the Federal Reserve by Matthew O'Brien

(see above)

Looks like Ryan: Mitt's Pick by Ryan Lizza

Lizza: "After spending weeks looking into Ryan’s history for The New Yorker, visiting his home town, and interviewing him twice, I am genuinely surprised that Romney chose him."

My prediction on oil prices isn't looking so good as gas prices here rise to $4.06/gallon. Although I did read in the paper that oil prices continue to decline.

A new (conditional) prediction. It could be that the Republican party "jumped the shark" this morning at 9:00 a.m. with Romney announcing Paul Ryan as his VP pick. Will the Republican party enter another period in the wilderness.

Jonathan Chait:

Most Americans have not formed an opinion about him. He has a long record of radical votes and is the functional leader of a wildly unpopular Congressional wing. The one real electoral test of his plan’s political tolerability came in a special election in a Republican district in upstate New York in 2011, in which an underdog Democrat swept to victory by relentlessly pounding Ryan’s plan, and especially its provision to privatize Medicare.

Why Washington Accepts Mass Unemployment by Jonathan Chait

Attacking the Treasury View, Again by Dean Baker

The IMF had become an unexpected opponent of fiscal austerity. Its research demolished the intellectual basis for the claim that fiscal contractions could be expansionary. It also showed that, at least in the short term, there was no basis for preferring spending cuts to tax increases to reach whatever deficit goal was set as a target.
...

Of course getting to full employment is the key question, but in principle if we get back to full employment we can hope to be able to restore the virtuous circle of the decades immediately following World War II, in which gains in productivity translated into gains in wages. This, in turn, led to increased consumption, spurring more investment, and, therefore, more productivity growth. It is important that the public understand that whether macroeconomic policy focuses on full employment or inflation-fighting, it is very much a class issue. Those placing the priority on inflation-fighting have decided to impose higher unemployment and lower wages on ordinary workers as the price of achieving their stated goal.

Stabilizing prices is immoral by Steve Randy Waldman

It is certainly true that there are groups in our society whose purchasing power we ought to collectively insure: retirees on fixed incomes, savers with moderate nest eggs. It is great that Social Security payouts are indexed, so that retirees enjoy some protection of purchasing power. But indexing is a visible, and visibly costly, form of social insurance. Because it is visible, we transparently ration its provision and allocate its costs. I do not argue that purchasing power insurance is immoral. On the contrary, we need purchasing power insurance and the state should invent explicit means to provide it. What is immoral is to hide what is arguably the government’s largest social insurance program behind the technocratic phrase “price stability”. This a scheme that forces the most precarious members of our society to insure the purchasing power of the most secure, without any limit or even any accounting of the scale of the transfer.

generational warfare fail by David Leonhardt by Dean Baker

Robert J. Gordon: Is Modern Macro or 1978‐era Macro More Relevant to the Understanding of the Current Economic Crisis? by DeLong

Unemployment Rate Without Government Cuts: 7.1% by Justin Lahart

The Labor Department’s establishment survey of employers — the jobs count that it bases its payroll figures on — shows that the government has been steadily shedding workers since the crisis struck, with 586,000 fewer jobs than in December 2008. Friday’s employment report showed the cuts continued in April, with 15,000 government jobs lost.

But the survey of households that the unemployment rate is based on suggests the government job cuts have been much, much worse.
In April the household survey showed that that there were 442,000 fewer people working in government than in March. The household survey has a much smaller sample size than the establishment survey, and so is prone to volatility, but the magnitude of the drop is striking: It marks the largest decline on both an absolute and a percentage basis on record going back to 1948.

Moreover, the household survey has consistently showed bigger drops in government employment than the establishment survey has.
The unemployment rate would be far lower if it hadn’t been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.

Ceteris is rarely paribus, of course: If there were more government jobs now, for example, it’s likely that not as many people would have left the labor force, and so the actual unemployment rate would be north of 7.1%.

It's regressive tax on the middle and lower classes as bargaining power is reduced because of a weak labor market. Cyclical unemployment is transformed into long-term unemployment as the nation's human capital and productive capacity is degraded. It's effective class warfare in the wake of a financial crisis caused by the finanical-system-casino being left to its own devices sans regulation.