Month: September 2013

Derek Thompson explains a key element of our jobless recovery – the public sector’s “unprecedentedly bad post-crash performance”:

The public sector collapse was not Obama’s plan. It is not his fault, really. It is scarcely his responsibility, since the vast majority of government jobs — and of government jobs lost — have been at the state and local level. The recession devastated state tax revenue, and states cannot borrow from international lenders like Washington. So most had no choice but to cut workers. The stimulus delayed, but did not indefinitely defer, the blood-letting. And, since Congress refused to extend support even as interest rates clung to historically low levels, it’s been brutal.

If we held government employment perfectly steady since Day One of Obama’s presidency — not one more government job, nor one less — job creation would have seen a 25 percent boost. Instead, Obama’s legacy will include an historically strange post-recession collapse in government unemployment — and a powerful lesson in the limits of presidential power.

Update from a reader:

Derek Thompson’s post about the recovery is correct to note that the plummet in government jobs largely explains the lackluster recovery, and for that piece of information it is really Bill McBride at Calculated Risk who should be thanked. But when Mr Thompson says “The recession devastated state tax revenue, and states cannot borrow from international lenders like Washington. So most had no choice but to cut workers,” he makes a series of errors and gross misrepresentations.

States can and do borrow from foreign sources in exactly the same way the Federal government does, which is by selling their bonds to foreign buyers. Not only was Mr Thompson wrong about that, but he implies that Federal borrowing is that Federal borrowing comes from a “lender,” which makes it sound like going to a bank for a mortgage. But that is not right. The “borrowed” money comes from bond buyers.

What States generally cannot do is engage in deficit spending. They have balanced budget laws to follow. States also cannot print money or engage in quantitative easing. These are all things that the Federal government can do. Mr Thompson gets this all wrong.

And then there is Mr Thompson’s most pernicious error. He claims that Federal “borrowing” comes from foreign “lenders,” and that is a damnable misrepresentation. Most US Treasury Bonds are held by US citizens and US-based financial entities. The debt we owe is largely to ourselves.

Getting all of this right is crucial for understanding how and why the implementation of austerity and campaigns demanding austerity (like Simpson-Bowles) have been so damaging to the economy during the recession and nascent recovery.

Matthew Boesler points to evidence that central banks have less influence in countries where the population skews old:

In [a] paper titled “Shock from Graying: Is the Demographic Shift Weakening Monetary Policy Effectiveness,” IMF economist Patrick Imam links aging populations in countries like the U.S., U.K., Japan, Germany, and Canada to empirical evidence that monetary policy has become less effective. “Based on the life-cycle hypothesis, we would expect older societies to typically have a large share of households that are creditors, and to be less sensitive to interest rate changes, while younger societies would typically have a larger share of debtors with higher sensitivities to monetary policy,” says Imam. And “with fertility rates plummeting around the world – often below replacement rate – including in low-income countries,” the IMF economist writes, “the world is going through an unprecedented demographic shift that is leading to a rapidly graying world.”

Neil Irwin elaborates:

What’s the theory? To start with, monetary policy works by changing the cost of borrowed money.

When growth is weak, a central bank cuts interest rates, which in turn makes spending, consumption, and investment more attractive. You’re more likely to buy a house or a car if the interest rate is 3 percent than if it’s 5 percent, for example. But crucially, the use of borrowed money is a crucial way that these lower rates translate into higher economic growth.

But borrowing money is disproportionately an activity of the young. Economists call it “life cycle hypothesis of saving” – people use credit to smooth out what they can consume over the course of their lives. When just embarking on a career, a young person might take out major loans for education and for buying a house and car. As they reach middle age, they will tend to have paid down some of that debt while also building savings. By the time they hit retirement age, they should be net creditors, with significantly more savings than they still owe in debt.

That would imply that in an older society fewer people are actively using credit products. Which should in turn imply that a central bank turning the dials of interest rates will be less powerful at shaping the speed of the overall economy.

Drum adds:

I can tentatively buy this. In fact, I’d toss out another possible channel for this effect as well: the elderly often live off investments, which means that their incomes fall as interest rates go down. So the bigger the proportion of elderly in a country, the more people you have who are forced to consume less because of low interest rates and the fewer people you have who are motivated to consume more by low borrowing rates.

If you’re rich. According to a new annual report, the top 10 percent of earners took in over half of the nation’s total income in 2012, while the top 1 percent collected one-fifth of all income:

The income share of the top 1 percent of earners in 2012 returned to the same level as before both the Great Recession and the Great Depression: just above 20 percent, jumping to about 22.5 percent in 2012 from 19.7 percent in 2011. That increase is probably in part due to one-time factors. Congress made a last-minute deal to avoid the expiration of all of the Bush-era tax cuts in January. That deal included a number of tax increases on wealthy Americans, including bumping up levies on investment income. Seeing the tax changes coming, many companies gave large dividends and investors cashed out. …

Allie Jones points out that this is a record gain for the upper income bracket, edging out the Roaring Twenties:

You can see that in 2012, top 10 percent income share creeps above 50 percent for the first time … Senior Brookings Institution fellow Justin Wolfers notes from the study that in the years since the crash (2009-2012), the average income of the top one percent has risen 31.4 percent, while the average income of the other 99 percent has risen only 0.4 percent.

Drum anticipates a counterpoint:

Now, I imagine that apologists for the rich are going to point out that their recent winnings still don’t make up for their losses during the Great Recession. And that’s true. … [S]ince the 2007 peak the rich have suffered an average income loss of 16.3 percent. The rest of us have done better: our incomes are down only 11.2 percent.

But this is meaningless. For starters, an 11.2 percent drop for someone making 15 bucks an hour is a helluva lot more painful than a 16.3 percent drop for a millionaire.