No fiscal cliff?

The New York Times 29 August 2012 Economix blog, "Is the Fiscal Cliff a Big Deal?" by Casey Mulligan is faulty, because it misses an Economics 101 opportunity cost issue.

...cutting unemployment insurance won't increase employment; in an environment where jobs are scarce, at most it will shift who has jobs...

Now it's easy to find non-economists making this mistake, or comparable ones. The Republican platform worries that trimming the Department of Defense's budget will cut jobs and hurt the economy, but turns around and claims that the roughly half of the 2009 stimulus package that added jobs somehow didn't help the economy. However, absent very large changes -- in an economy with a labor force of 155 million, a million jobs one way or the other is not a large change, however much it matters to those million people -- if such effects exist, they are symmetric.

What Mulligan assumes is that such issues never exist. The issue of unemployment is that people aren't looking for work. So cutting unemployment benefits will actually lead to more people working. First, unemployment benefits are not that generous -- if you're on a tight budget, you really need more income. But in today's context that's beside the point, because the underlying rate of unemployment is high. Corrected for changes in the working age population, the gap from where we were before the recession started is 14.5 million jobs.

Let me give an anecdote. My son has hunted for a regular job for a year, with no "bites" -- other than to become a low-level fast-food supervisor. He does better doing landscaping for neighbors. But a few years back he had opportunities, but wanted to finish his college degree. Most of his friends are in the same position, job-hunting, though they may have part-time jobs that provide some income.

Now an anecdote is not data; it only helps you think about what might be going on. But it does suggest that we look at overall unemployment. After all, if you want to argue that collecting unemployment checks is what is holding the economy back, you have to explain the source of a sudden shift in ethics in early 2007 that led 10-plus million Americans to decide that sitting home was a nice option. Instead, we can look at job losses and mass layoffs, both tracked by the Bureau of Labor Statistics. Their data also show a rise in those "working part-time for economic reasons", that is, people who have had their hours cut but want to work more. If the mass laziness story is true, then we shouldn't see this happening, either -- we'd expect to see the number of people happily accepting part-time work also rising. The data show they're unhappily accepting such work because the alternative, unemployment, is worse.

Mulligan's analysis of why in fact the "fiscal cliff" won't actually hurt growth isn't worth a "mulligan" -- this analysis is too sloppy to be anything more than ideology wrapped in professional credentials; the Times shouldn't grant him another shot.

Incentives do matter -- my paid employment lies in trying to teach students that -- but they aren't the only things that matters. In this case jobs simply aren't there. So if someone enjoying life on the dole gets a job, that means someone else won't have a job. Unless employment opportunities increase, it's a game of musical chairs. That reflects the second main thing that I am tasked with conveying to students, that they calculate opportunity costs appropriately, without double-counting or missing something. Mulligan totally fails to ask whether opportunities have shifted; he would earn a 50% grade in Economics 101.

...mike smitka...

Paul Ryan: In all honesty, there's nothing there to critique

... [to] gut medicare...is economically irrelevant...because it represents an unfunded mandate...

As an economist I place little credence in words, and so in all honesty I can do little to critique Paul Ryan. That's because his track record in Congress is minimal – in 13 years only 2 bills with his name have actually passed, and neither was substantive. True, he's put his name on many bills, but they've gone nowhere. So while he claims to be for sound budgets, as an economist I see no evidence of that in what he has accomplished during his 6-plus terms in the House. If anything, his voting record points the other way: he's cast an "Aye" for numerous budget-busting laws, including the Bush-era tax cuts and the Medicare prescription drug bill that expanded benefits but not revenues. Furthermore, he did support the Bush bail-out measures, a mark in his favor as putting things practical over things ideological. His track record is too thin to tell whether he is primarily pragmatic. Of course his telegenic persona conveys a different message, but it is a message without substance.

As to ideas, well, Ryan is allowing himself to be portrayed as a neo-fisc, the new breed of Republican fiscal conservatives who promise to balance budgets while cutting taxes.* To date the neo-fiscs have shown no ability to deliver. Yes, they've cut taxes. But no, they've not closed loopholes – Ryan's proclaimed preference – and no, they've not controlled expenditures. Ryan is true to neo-fisc form, in that he has not spelled out details on either front, except that he won't cut defense, hardly an example of controlling expenditures. Oh, he's promised to gut medicare, but that's neither politically credible nor economically meaningful. Why is it economically irrelevant? That's because it represents an unfunded mandate: we as a society don't tolerate emergency rooms refusing to admit car accident victims or nursing homes trundling elderly patients to curbside because they can't pay for their next day. Those costs will have to be loaded onto the charges for people with insurance. In short, the neo-fisc position consists of slogans and not fleshed-out policies; you can't label proponents ideologues, because you have to have ideas to be an ideologue.**

...you can't label [neo-fiscs] ideologues because you have to have ideas to be an ideologue...

For Romney – surely he is in charge of his campaign – Ryan is a convenient mouthpiece, his value enhanced by his skimpy track record, because unlike the beach, it hides rather than reveals. Ryan is already energizing the disaffected on the right, who might otherwise sit the election out. Meanwhile that frees Romney to move toward the center, where the swing voters reside. He doesn't have much time left to do that, but there's also little evidence that people vote their pocketbooks; style seems to trump substance.

I've blogged on Japan and Economics about debt and deficits, choosing that forum because Japan's debt is far higher and thus less sustainable than ours. But Japan has also started to do something about it, passing an increase in their national sales tax (the final deal was hammered out on August 10th) when further budget cuts proved illusive.

* I will blog on Japan and Economics about debt and deficits, choosing that forum because Japan's debt is far higher and thus less sustainable than ours. But even in Japan it's not a crisis, and in addition Japan has started to do something about it, passing an increase in their national sales tax (the final deal was hammered out on August 10th) when further budget cuts proved illusive.

** My computer's dictionary would thus label such "demagogues:" politicians who "appeal to popular desires and prejudices rather than use rational argument." My sense is that campaigning via sound bites forces all candidates to rely on that game. Hence polls matter, policy analysis does not. My training as an economist however suits me only for the latter, and so that's what I blog.

Mike Smitka

What Romney Thinks Matters

...our problem is strong growth!?...

Mitt Romney's choice of a vice presidential is puzzling. As I see it, Paul Ryan's primary strength is that he shares a name with Rand Paul. Ryan has never worked outside the Beltway; he's a pure Beltway insider. Obama at least worked before running for office, as a professor, as a lawyer and as a community activist. (Anyway who thinks Obama is a liberal needs to check where he taught, too -- not too many years ago the Republican Party might have thought he was a little too conservative for them!)

Back to Ryan. I looked at junior's budget proposal months back, and it didn't make dollars and cents -- the arithmetic simply didn't add up. He wanted to reduce the Federal government to 3.75% or less of the economy. But he also promised not to touch the military -- and the Department of Defense and related expenditures are a full 4.0% of our economy. And that's just for starters. I didn't see any point in spending more time on his proposal, but suppose I'll now be forced to read through it carefully. Not today.

In any case, Romney's choice does deliver a clear message, that he views our primary problem as economic growth so strong that it is driving wages up -- because if interest rates are zero, government debt costs our society nothing. As a Wall Street insider, Romney can't claim not to know that. Now wages are our economy's biggest cost. If they aren't rising, we can't have inflation. Food prices go up and down; so do energy costs. But both are modest slices. Ours is a service economy; what matters are not things solid and liquid, but how much it costs to pay someone to cook us a meal, or change a bandage, or set up an IT system.

So Romney must believe that unemployment is not a problem. Too much employment is the problem -- despite the 8.3% headline.

He's out of touch with the world in which I live, with a recent college grad at home, still unemployed. And hasn't Romney read the latest inflation reports from the Bureau of Labor Statistics? -- April, 0.0%; May, -0.3%; June, 0.0%. The average is deflation. For those of you who believe in conspiracies behind every door (and the doors at the BLS are kept locked VERY tight prior to announcements, listen to the August 3rd 2012 Planet Money podcast Keeping the Biggest Secret in the US Economy), well, the Billion Price Project that relies solely on private sector data tells a similar story: there are simply no signs of inflation.

Will Ryan help Romney pull in votes? I'm not a political scientist, and know neither whether Wisconsin is a close race nor whether Ryan is respected there. All I know is that his state is not on the "swing" lists I've seen. Otherwise, unless a VEEP embarrasses the main candidate -- I used to live in Ferraro's home district, and so know up close that some picks are underwhelming -- the apparent reaction of voters is "who cares?" Still, a junior House member doesn't seem an impressive pick.

Does Ryan appeal to swing voters -- well, I think not. I used to dance from party to party, but for a couple decades have lived in a Congressional district where elections haven't been contested, so I don't know whether I can still swing. (My blue suede shoes are Galabrier "Royal Robbins" rock climbing boots from the 1970s, so no, I can't dance.) Still, my gut feeling is that Ryan has no appeal even among moderate Republicans.

I'd like an alternative to Obama. But It doesn't look like the Republicans are providing one this time around.

Mike Smitka

CORRECTION: I do not follow who is whom among politicians, current and would-be. In the process I confused Paul Ryan with Ron Paul Jr (and hence Ron Paul Sr). In the first version of this page I mistakenly wrote that Ryan's strength was his father's name recognition. That is wrong; Paul Ryan's father died while he was a teenager.

It's not just kids and retirees

...early retirement and education aren't "safety valves"...

At 8.3%, "headline" unemployment represents 1 in 8 would-be workers without jobs. Furthermore, we know that we're seeing not just high unemployment but also a big drop in the size of the labor force. That is, we've observed a big drop in the unemployment-population ratio.

OK, but isn't this just youth staying in school longer? And baby boomers who are retiring, or retiring early? After all, the unemployment rate for "prime" workers is 7.2%, rather lower than the July 2012 average of 8.3%. And if we're thinking of the impact on families -- kids -- high "primer earner" unemployment is more worrisome than that at the young and old ends of the age spectrum.

Now for the population as a whole employment has fallen more than unemployment has risen. Rephrased, the non-participation [in the labor force] rate rose, from 33.9% in January 2004-December 2006 to 36.2% over the 6 months ending in July 2012, a 2.3% rise. Relative to the base (66.1%) that's equivalent to a 3.5% rise in unemployment. If we add that to the headline rate we get 11.8%.

This sort of shift doesn't typify previous recessions. But perhaps this time around it's not the recession but long-term trends that happen to be showing up now. [See the graph below on the long-term trend.] In particular, we've far more youth in higher education, and baby boomers are in their early 60s. So it could be that large numbers of younger individuals are staying in school -- or, having grim job prospects, are enrolling in community colleges en masse. Meanwhile, for the boomers, while retiring before age 65 may be painful, it's feasible. And government workers and others can qualify for pensions before age 65, and don't have to wait on social security.

Unfortunately, the data show it's not just boomers and students: the shift for the prime age workers (age 25-54) is in fact is larger than that for the population as a whole. We're not in fact seeing a boom in schooling and early retirements.

In particular, during the bubble era 2004-7 prime age labor force participation rose by 1.4 percentage points, from a peak of 78.7% to 80.3%, and averaged 79.4% over January 2004-December 2006; over the last 6 months, through July 2012, it's averaged 75.7%. That's a drop of 3.7% (and an equivalent rise in the non-participation rate). Doing the same arithmetic leads to an adjusted unemployment rate of 11.9%. At one level it's not surprising; prime age workers (25-54) are a large proportion of the standard labor force (age 16-64), so the averages can't diverge all that much. Still, I'd hoped otherwise. But early retirement and education aren't "safety valves" that mute the impact of the Great Recession. That's not the case

...Mike Smitka...