Why Still No Real Jobs Takeoff?

For each month of this recovery, I’ve been tracking the change in the employment-to-population ratio and comparing it with the recovery from the previous deep recession in the 1980s.  Here is the latest update based on today’s release of February data:

emp-pop feb 2014

and here is a post from 2011 for comparison. It’s remarkable that there’s still no take-off and the percentage employed is still below what it was a bottom of the recession.

As would be expected after so many disappointing years, some are now seeing this as a secular issue of low labor force participation unrelated to the slow recovery from the recession. But research by Chris Erceg and Andy Levin, (Labor Force Participation and Monetary Policy in the Wake of the Great Recession) provides what they consider to be “compelling evidence that cyclical factors account for the bulk of the post-2007 decline in labor force participation.”  One convincing piece of evidence is their chart (see below) which shows the labor force participation rate (LFPR) projection by BLS and CBO before the downturn based on the demographics about which there have been no surprise.  The actual LFPR (63.0 percent as of today) is well below these projections.  Erceg-Levin

Posted in Slow Recovery

The 2014 G20 Growth Agenda and the 2003 G7 Agenda for Growth

At their meeting in Sydney last month the G20 announced a promising new “G20 Growth Agenda.” They centered the initiative on a goal of raising real GDP by over $2 trillion (see communique paragraph 3) compared with current projections by increasing economic growth by ½ percent per year for 5 years, with a commitment to come back next time with proposed policies to achieve the goal.

Where do these numbers come from?  The IMF staff simulated an econometric model of the G20 countries and showed that growth would speed up by this amount if the countries adopted certain policies.  Most of the policies considered by the IMF are supply-side (structural) rather than demand side policies.  They include “fiscal consolidation,”  “product market reforms,”  “labor participation reforms,”   “other labor market reforms,” along with some “infrastructure” and “rebalancing” reforms that have a longer run impact through saving and investment.   According to the IMF “about 1/3” of increase in growth rates comes from “positive productivity spillovers between members, the main source of growth spillovers.”

Of course, the heavy lifting will be at future meetings when the countries are supposed to come with their own list of pro-growth policies that they are pursuing, presumably similar to those suggested in the IMF simulations.  Will this actually happen?  How can it be encouraged?

We can learn from a very similar initiative of ten years ago: the 2003 G7 Agenda for Growth. It too focused on pro-growth supply-side policies, with countries committing to particular policies. The commitment process lasted for a couple of years but eventually lost steam—as is so often the case with such international initiatives—as people rotated out of various leadership positions in their governments. The new G20 Growth Agenda is likely to suffer the same fate unless there a way to make the initiative longer lasting than the current leadership positions. Let’s hope the G20 and the international financial institutions can create the needed commitment mechanism.

Posted in International Economics

Why It’s Hard to Make the Unpopular Stimulus Look Good

Some columnists have been using the 5-year anniversary of the 2009 discretionary fiscal stimulus package to claim that it worked to jump-start the economy.  It’s a tough case to make.  The very word “stimulus” has become a dirty word because so many Americans view it as a failure.

So the new argument admits that the stimulus failed politically, but chalks that up to a misinformed public that does not understand that it was a success economically.  Thus Ed Luce’s piece in the Financial Times is headlined “RIP Obama stimulus: funeral for a policy success,” while John Cassidy adds in the New Yorker that “Obama’s unpopular stimulus won’t be the last,” and Michael Grunwald writes in Time that “Politically, the White House lost the argument over the stimulus long ago, but it’s still nice to see the facts in black and white,” referring to report coming out of the White House arguing that the stimulus worked.

To make this case one has to claim that there is wide agreement among economists (not just current White House economists) that the stimulus worked.  Thus Ed Luce writes, “Rarely has the gap between the US public’s perception and that of economists been greater.”  But there is simply no such consensus among economists.  My research and that of others, shows that there is little direct empirical evidence that it had a significant effect. At best, there is divided opinion among economists about the stimulus.  Indeed, there has always been great deal of disagreement among economists on the efficacy of these temporary “Keynesian” stimulus packages. And during the 1980s and 1990s there was a huge amount of skepticism of their usefulness.

How do the new pro-stimulus arguments deal with the fact that there is clear disagreement?  Some ignore it and simply assert that there is agreement.  Others claim, as does John Cassidy, for example, that the economists on the “it didn’t work” side, such as John Cochran and me, actually favor these stimulus packages.  John Cassidy refers and links to a Wall Street Journal article of mine written after the 2008 stimulus but before the 2009 stimulus.  But that article was explicitly critical of the Keynesian temporary stimulus package then under consideration and eventually enacted.  It explicitly argued against such “temporary, targeted, timely” policy actions proposing instead “permanent, pervasive, predictable” policy.   It is no where near favoring the type of package that was enacted in 2009 (or in 2008).

Posted in Stimulus Impact

A Small Step Toward Monetary “Coordination” at the G-20?

This weekend’s G-20 statement reiterated the concerns—largely coming from emerging market countries—about unconventional monetary policies (UMP). But the language of the central bankers and finance ministers was subtly softened. In July and October 2013 the G-20 statements contained warnings about such monetary policies’ “adverse implications for economic and financial stability” and the need to “manage their spillovers on other countries.” But this weekend it simply said central bankers should be “mindful of impacts on the global economy,” adding that “reduced reliance on easy monetary policy would be beneficial in the medium term for financial stability.” So rather than saying the policy is harmful it said that removing it is beneficial.

This statement is remarkably mild compared to the candid views of some central bankers, such as Raghu Rajan who said this about unconventional monetary last summer before he joined the Reserve Bank of India, “Never in the field of economic policy has so much been spent, with so little evidence, by so few.”

But I think it is more than simply a diplomatic effort to seek a more agreeable tone.  The central bankers and finance ministers seemed actually to agree that a gradual and transparent tapering of UMP is appropriate now, regardless of what they think of the past effects of UMP.

It also gives more meaning and credibility to the boilerplate pledge repeatedly appearing in recent statements that “monetary policy settings will continue to be carefully calibrated and clearly communicated.”  It perhaps is even a small step toward a bit more coordination in the sense used in a BIS paper I presented to central bankers gathered in Switzerland last June: “Going forward the goal should be an expanded rules-based system similar to the 1980s and 1990s which would operate near an international cooperative equilibrium. International monetary policy coordination—at least formal discussions of rules-based policies and the issues reviewed here—would help the world get to this desirable situation.”

Posted in International Economics

Another Anniversary: The Macro Alliteration Wars

Before we get too far away from the 5th anniversary of the 2009 stimulus signed into law on February 17, 2009 (or the 6th anniversary of the 2008 stimulus signed into law on February 13, 2008 ), it’s fun to recall the alliterative mantra associated with these packages.  The mantra is often attributed to Larry Summers, who in testimony before the Joint Economic Committee of Congress on January 16, 2008 asserted that “A stimulus program should be timely, targeted and temporary.”  (Doug Elmendorf and Jason Furman—now at CBO and CEA—used the same language in a Brookings report).

Larry’s mantra apparently persuaded many who listened, and a stimulus package with exactly these three characteristics was passed a few weeks later.  Unfortunately that stimulus did not jump start the economy (see this AER paper). So when the discussion of another stimulus began after the presidential election of 2008, I argued against it.  In testimony before the Senate Budget Committee on November 19, 2008 I said, “Going forward, we clearly need a new set of principles and a new mantra. Based on recent and many past experiences as well as much economic theory, and in keeping of course with the need for alliteration, I recommend an alternative stimulus mantra: permanent, pervasive, and predictable,” and then outlined my preferred economic strategy with these characteristics at the hearing and in the WSJ.

The alliteration game then quickly when viral. In a November 25, 2008 blog post, called Competing Alliteration, Greg Mankiw listed his readers’ suggested ways to describe the stimulus then being considered:

big, bloated, and borrowed.

immodest, immoral, and imbecilic.

clumsy, corrupt, and counterproductive.

expansive, extensive, and expensive.

weighty, worrisome, and wayward.

politicized, pandered, and pathetic.

socialized, silly, and sorry.

random, record-setting, and ridiculed.

ultimate utilitarian utopianism.

absolutely abjectly apocalyptic.

Unfortunately, none of these caught on in time.  When Christina Romer called me in December to ask about my views, I repeated my Budget Committee recommendation, saying that another “temporary, targeted, and timely” program would be a mistake. Neither Romer nor Summers, now both going into the Obama administration, were persuaded, and the 2009 stimulus package was passed. I discussed the results in my previous blog post.

Posted in Stimulus Impact

Next Time Remember the Lessons from Stimulus Packages

It’s the five-year anniversary of the 2009 stimulus package. I’ve done a slew of empirical research on the stimulus in those years from predicting in advance that its impact would be small to estimating afterwards that its impact was small.  I also wrote over 25 posts on the subject on Economics One, which are listed below with links.  Some posts provide new evidence. Others summarize my research with John Cogan and Volker Wieland, or refer to congressional testimony. Still others are about debates with Alan Blinder, Paul Krugman, Christina Romer, Larry Summers, and Mark Zandi. As a whole the findings summarized here provide evidence that the stimulus was not successful in jump-starting the economy or in stimulating sustained growth. Similar results were found in stimulus packages in the 1970s. Keeping a record may help us remember the lessons so we don’t do it again next time. 

Valuable Dissent to the Transportation Research Board’s Special Stimulus Report, Jan 18, 2014

New Model Validation of Stimulus Impacts, Apr 16, 2012

More Debates about the Stimulus Debate, Mar 5, 2012

Debating Stimulus and Harvard and Stanford, Mar 2, 2012

Not More of the Same Model Simulations!, Sep 25, 2011

Two Congressional Hearings on the Second Stimulus and Alternatives, Sep 14, 2011

Don’t Stay the Course, Sep 7, 2011

No Near-Consensus Among Economists for Another Stimulus Package, Aug 16, 2011

No, A Bigger Stimulus Would Not Have Worked Either, Jul 4, 2011

How to Resolve the Stimulus Debate: Use Data, Not the Same Models Over Again, Jul, 2011

Why the Stimulus Failed to Boost Infrastructure in the US: A Comparison With China, Mar 25, 2011

The Empty Chairs at the ARRA Hearing, Feb 16, 2011

Models Used for Policy Should Reflect Recent Experience, But Do They? Dec 29, 2010

Stimulus Math: Many Multiples of Nothing is Still Nothing, Dec 9, 2010

More Evidence on Why the Stimulus Didn’t Work, Oct 30, 2010

TV Fiscal Stimulus Debate Reveals Some Agreement, Jul 31, 2010

More on the Blinder-Zandi Working Paper on the Crisis, Jul 29, 2010

Latest Data Continue To Show Little Impact of Government Stimulus on GDP, May 1, 2010

Macro Model Disagreements and Reality, Feb 22, 2010

Stimulus Anniversary Blog, Feb 17, 2010

One Year Later and More Evidence that the Stimulus is Not Working, Feb 3, 2010

From Fiscal Stimulus and Fiscal Anti-Stimulus, Jan 12, 2010

Measuring the Impact of the Stimulus Package with Economic Models, Dec 30, 2009

Jobs saved: PR or Fact? Nov 6, 2009

National Accounts Show Stimulus Did Not Fuel GDP Growth, Oct 30, 2009

Despite claims, data continue to show small impact of stimulus, Oct 24, 2009

Is the Stimulus Working? Sep 20, 2009

 

Posted in Stimulus Impact

Should Policymakers or Macro Models Be Taken to the Woodshed?

There’s a good debate going on about the usefulness of macro models, and in particular whether the so-called New Keynesian models let us down or even helped bring on the financial crisis and the Great Recession.

This weekend Noah Smith argues that the new Keynesian models were built for the “last war” and thus missed macro-financial connections or the zero interest rate bound needed to understand the Great Recession and slow recovery. Simon Wren-Lewis writes that the models omitted key factors by focusing too much on rational expectations and other micro-foundations which “crippled the ability of New Keynesians to understand subsequent real world events.” And back last summer Paul Krugman in Macroeconomists at War wondered if these models were being used much at all, saying “It would be interesting to know how many graduate departments were in fact teaching New Keynesian macro in 2008. My guess is that a fair number weren’t.” Underling the debate is an implicit view that New Keynesian models deserve much of the blame for the poor economic performance in recent years, and should be “taken to the woodshed” as Chris House put it.

For what it’s worth, here are my thoughts on these issues based on years of building, using, and teaching such models.

A defining characteristic of New Keynesian models is the combination of “wage-price rigidities” and “rational expectations.” Early examples are the stylized models by Stan Fischer and Ned Phelps and me (published back-to-back in the JPE) and the empirically estimated econometric models based on staggered price setting. Old Keynesian models prior to this did not have rational expectations, and new classical models did not have sticky prices. The Mankiw and Romer book New Keynesian Economics was a collection of such models. An up-to-date compilation of models since then—with special focus on empirical models used in practice for policy in many different countries—is contained in Volker Wieland’s model data base, and the new paper by English, Lopez-Salido, and Tetlow explains the Fed’s current New Keynesian model.  Of course some New Keynesian models are better than others; some are still quite stylized, but others are fully estimated and fit the data well.

What was the motivation for the new models? They were originally designed to be an improvement over existing policy evaluation models (old Keynesian and new classical) which could then be used to find better policies than the failed policies of the 1970s. In these models, monetary policy had important effects and rational expectations techniques made the models more useful for many policy issues. The new models were not designed to explain the Volcker recessions of the early 1980s. As defined here, the models came before those recessions.

What about the rules versus discretion debate? As a technical matter, the very nature of the rational expectations assumption built into the models meant that the policy evaluation was originally about alternative policy rules rather than discretion—interest rate rules, money growth rules, exchange rate rules, etc.

What about the zero bound? It was not ignored.  From the start of research on interest rate rules, the zero bound on the interest rate had to be taken into account in the policy rule simulations. In my 1993 book (Chapter 6) the interest rate was set at a small positive value (say .01) whenever the formula gave a rate below that value.

What about graduate teaching? Some graduate programs began teaching such models early on. Jim Tobin asked me to team teach a graduate course with him in 1980 to get the ball rolling at Yale. Fischer and Olivier Blanchard taught the models at MIT. Ben McCallum taught them at Carnegie-Mellon. David Romer, Carl Walsh and Mike Woodford wrote textbooks which featured such models. Several Stanford grad students (John Williams, Volker Wieland, and Andrew Levin) learned about the models and went to the Fed where they helped introduce them there. I continued to teach a course based on these models after I returned from Washington in 2005 and still do. Lars Svensson, Jordi Gali and others were teaching the models in Europe. Of course the ideas took a while to catch on in some schools, and in a few cases they never caught on.

What about the macro-financial connection?  Research by Tobin and Brainard, Gurley and Shaw, Brunner and Meltzer was available when the new Keynesian models arrived, and Ben Bernanke, Jordi Gali and Mark Gertler had already made enough progress in the 1990s that Mike Woodford and I included it in the Handbook of Macroeconomics (Volume 1C, Chapter 21), published in 1999 long before the Great Recession. (Mark Gertler and Nobu Kiyotaki will be doing a “follow-up” chapter in the forthcoming new Handbook of Macroeconomics edited by Harald Uhlig and me.)   But my experience was that when it came to fitting models to data the lack of good flow of funds data led researchers to focus on financial market prices rather than quantities, with the financial frictions appearing as interest rate spreads. Recent theoretical research and better data are improving this situation. Of course, economists should try to improve their models to make then more useful for policymakers, and it is certainly a worthy task to improve our understanding of the credit channel.

One can criticize the rational expectations/sticky price models by saying that they do not admit enough rigidities, or have only one interest rate, or do not have money or credit in them, or simplify too much with rational expectations. But simplified versions of models, which frequently boil down to only three equations, should not be confused with more detailed models used for policy. Many of the models listed in Volker Wieland’s model data base are more complex, have time varying risk premia in the term structure of interest rates, an exchange rate channel, and more than one country.

I do not see the evidence that these models led policy makers astray or were a cause of the financial crisis. To the contrary I have argued that the general policy recommendations of these models—which generally took the form of particular monetary policy rules for the interest rate instrument—were not followed by policy makers in the years leading up to the crisis though they followed them during the Great Moderation. Ignoring the recommendations was the problem rather than the recommendations themselves. These models did not fail in their recommendations. Rather the policymakers failed to follow the recommendations.

 

 

Posted in Financial Crisis, Teaching Economics