|Back to Previous Page|
ASSA/AEA Annual Meetings 2012:
Sustainable jobs is the topic for me. At the outset let me comment on today’s employment report. We had a labor market report they released in December suggesting, and I believe confirming, light at the end of the joblessness tunnel, a higher pace of jobs creation and of people finding work—not anywhere near most historical upturns, but those are the good old days, we won’t see those anytime probably in our remaining professional lifetimes; but better by enough to be part of a self-sustaining and sustainable positive feedback loop in the macroeconomy, which includes jobs, and sustainable jobs. It’s all taking place within a permanently lower US trend, rate of growth trend, rate of growth and in its potential growth a la the Bob Gordon gloomy view of the future for those gloomy reasons that he gave us. And the PIMCO new normal and the Alan Sinai view of the future, which is 2 to 2½%, is about the best we can do.
On this low-level uptrend, though, we have household financial conditions, commonly called deleveraging, which is too narrow a way of defining it, but far more familiar maybe to you, after years and years of massively easy monetary policy, improving enough to lift consumption enough, that 70% of the economy, to provide an impetus or catalyst for the better but not good jobs now showing up, and a declining but still sticky-high and unacceptably high unemployment rate from a policy point of view.
On this loop, for Obama fans, we could all be surprised come November with a lower unemployment rate than is conventionally thought.
Or to put another way, I think one can finally see, after agonizingly long lags, some traditional effects of easy money on household balance sheets through low cost of borrowing, through debt reduction as a source of spendable funds, increased retail sales where you would expect them to occur on this kind of phenomenon, increased consumption, increased jobs, increased consumer sentiment, increased consumption, etc. This loop, this mechanism looks like it’s clicked in, and a wide range of high-frequency data are supporting it. A private sector is starting to do its job on jobs. The possible result, on the longest lags ever between easy money and a response in the economy that I’ve ever seen. Remember, the Friedman lags were six to 18 months long and variable; we’re talking about four years here. That’s not just long and variable; that’s kind of like forever. And I do think it’s clicking in.
Or another way to say it is that the happy dust of the Fed—that’s low interest rates and easy money—almost always inevitably gives us an economic upturn; looks like it’s giving us an upturn and sustainable jobs, sustainable jobs at a higher pace than what we have seen.
So I want to look at four questions, and the handouts deal with that: how jobless and aberrant has this upturn been—that’s pages one through four; why jobless recoveries and sticky-high unemployment and under-employment—the why is pages five to eight, I’m going to take you through highlights of that; what to do to get sustainable jobs at a high level and to get a much lower unemployment rate—that’s pages nine to ten; and then some conclusions, which are basically it ain’t gonna happen. What we see is what we got, which is a better growing economy, a better jobs picture. It’s nowhere near the old days. The old days are gone. They are really old. They’re really gone. The new world is a different world-- better jobs, but not good.
So, on page one of the handout, a look at what initially I called this episode, I said it was going to be the mother of all jobless recoveries. And there’s a bunch of references at the end that get you too that. It is not quite the mother of all jobless recoveries. Indexed to the beginning of recovery, starting in June ‘09, when the recovery began, this is the second worst thirty months out performance for non-firm payroll employment in all of our economic upturns.
I want you to note the November ’01 beginning of recovery, and the March ’91 beginning of recovery, of course the June ’09 beginning of recovery. The last three post-recessions have given us, going out thirty months, compared to history, very anemic, very poor performance on the jobs front. I think that is a structural shift in the economy, the way companies hire given the incentives that they have and the mantra of maximize your older value. It’s referred to in a short article in the papers and proceedings of the May 2010 American Economic Review. I think Bob has done a little work on this and the company incentives that might be giving rise to this. But it’s distinct here. It’s the last three post-recessions that we have seen joblessness. Joblessness is defined as a number of months of declining non-firm payroll jobs after a recovery is begun, according to the National Bureau of Economic Research. It used to be a coincident indicator for the National Bureau of Economic Research […?]; but on the last three episodes it should be a coincident indicator, and it now lags. I’ve defined it as 100,000 or less, and we’re over that now, so we’re out of the joblessness. So this was not the mother of all jobless recoveries unless we have a big relapse.
The unemployment rate in Figure 2, its performance is also not the worst when you index it to the beginning of the recovery. It’s been sticky-high, it’s been at a pretty high level; but also it is grouped with the post-’01 recession and the post-‘90-’91 recession, once again saying something maybe was different in these post-recessions in the labor market and the behavior of the labor market from all other post-recession upturns. So joblessness in an economic recovery is not new. It also showed up post-1991 and post-2001.
Well, a second question: Why? Why jobless recoveries and this time around sticky-high unemployment, and in the ’01 episode and the ‘91 post-recession episodes, sticky-high unemployment? One reason this time is the current episode, economic up-cycle is clearly aberrant. We had an extraordinary 2007-9, deepest, longest recession in modern history. We’ve had a [sub-power?] upturn. It’s what you should expect on the work of Rogoff Reinhart. It’s what you should expect on our work in terms of how we model the structure and the innards of the economy and how it behaves and how we model the transmission mechanisms which haven’t been working between easy money and the economy. And you see its aberrance in Figure 3, where, on a real GDP basis, since the recovery, this is the worst-performing upturn in all of the ones, recovery and now expansion, in all of the post-World War II upturns.
In Figure 4 you see one of the reasons for the what I call aberrant business cycle episode. It’s that after a huge collapse in auto sales and housing, we didn’t really see much life in these two big-ticket item areas until the last four or five months. We are seeing some life, some pickup in autos and in the early indicators of better housing; but for fully almost two years and a little more, the kind of thing that always happens in an economic upturn, pent-up demands leading to consumers buying a lot of cars and a lot of houses on low interest rates and availability credit—it didn’t happen. That’s a big chunk of consumer spending, and it is a major reason why the financial side of households has done well.
It is debt reduction—not that income is growing so the debt-to-income is benefiting from income growing; not from assets rising in value, because the stock market hasn’t done that well and housing values aren’t doing well at all. The improvement in the household financial condition as we measure it comes out of reduction in debt. Some of it’s forced by bankruptcy and failures; some of it’s voluntary; some of it is because consumers have not been buying cars and houses. And so the catalyst here as we look at it and we analyze and look at an integrated financial real set of activities in the economy is a much improved household balance sheet—still not normal—freeing up funds because the monthly payments on big-ticket item debt are way below what they used to be, giving them some spendable money at a given level of income, lifting consumption, lowering the [?] savings rate, and allowing the economy to get a push up and us to see the high-frequency data, including […?] better jobs that I talked about earlier.
On page 4 is our view of this upturn going out four years. And it looks at, in all the year one, two, three, four—those are the years after the end of the recession. And it tells you how real GDP behaved in the first year, second year, second year compared to the first year, third year compared to the second, etc., for four years out in the recession recovery. Also for consumption, also for non-firm payroll employment. This episode, 2007, the post 2007-9 episode, with the two years of actual data in, clearly the most anemic ever. Look at it compared to the average and median figures of all of the post-recession episodes over all of these episodes, in these three measures, and our forecasts, which could be wrong, but those are our forecasts, suggest that we will be below average, below median, below par well into 2014, at least. At least on our analysis, including how we think Washington will deal with the deficit.
So why this performance? In pages five to eight I want to take you only through a few. You can look at the rest later. Basically the story is that internal to the economy, the adjustments, many of them financial that are going on, have, do take a long time when you have the kind of prior conditions occur that have occurred. We’ve seen this in Japan, we’ve seen it in lots of other countries; it’s been documented empirically in Rogoff Rogoff for a number of countries that have great weaknesses and great financially driven declines, asset bubbles that burst, price bubbles that burst, etc.
Figure 5 is our summary measure of the household financial conditions. Its worst position ever in history was a high number. High is bad here, low is good. And the second, it’s the third quarter of 2009. Look where it is now. That’s coming from reductions of debt, not because income is going up much. Debt to income, assets to income, monthly mortgage payments, monthly repayments to income and assets, interest charges relative to income are way way down because the debt is down. Now we’re not back to normal. We are judging equilibrium to be 120 as an index value. I suspect it’s actually lower because households have problems with retirement. We’re not going to be financially whole anytime soon, no matter what this index says; but it does say that the motion is positive. And as we have looked at the data, we’re finding it that way. It’s a summary measure of about ten different variables with weights based on history. It’s that way because of the tremendous reduction in debt, and in particularly big-ticket item debt that has not been taken out.
Of course we know that the financial intermediaries and intermediation is compromised, and you see in Figure 6 the excess reserves that are being held, pumped into the banking system by the Federal Reserve going nowhere. High levels of excess reserves in banks and the low level of lending that goes on by banks—that still is broken, that transmission mechanism. The Fed eases, the banks are in between, and then households have to do something with it. They have to want to borrow, but when they’re deleveraging and fixing their balance sheet, historically in this time they don’t do that until the balance sheet is in good enough shape, and then they begin to start to spend, depending how that happens and that’s what we think is going on.
Consumer sentiment, which has been extremely depressed, the post-’09 episode, the solid line, Figure 7, has started to pick up. That’s exactly what we should see when you are having frankly an interest rate easy money policy-drive upturn in the economy. They all go together. And if you look at the sharp upturn in consumer sentiment from these incredibly low levels lately, pretty much unexplained by most, it looks quite sensible.
And the final reason is one I really want to highlight. It’s what I call the disconnect between Wall Street and Main Street. For EPS aficionados I think this will resonate because it speaks to the rapacious nature of our corporate sector, which many of us in the markets call good old greed, and simply what they’re paid to do, which is to make a buck for the mantra—which I no longer thing is a good thing, maximize shareholder value. That is the mantra of publicly held companies: maximize shareholder value. We do everything for the shareholders. Now it turns out that over time the shareholders that run the company have gotten very big in terms of restricted stocks, stock options, and patterns of compensation. And so it seems to me that if the game is to maximize shareholder value, which is not the same as maximizing expected profits, or profits, that they’re going to want to keep costs down and grow revenues. They want to keep costs down, […?] all in with the benefits as well as the wages. Why would you want to hire somebody, because it will raise costs and knock profits down, and that will hurt shareholder value. So if you’re a rational executive, incented [sic] in the way I described, you really ought to want to do the reverse, and to find all kinds of ways not to hire.
And if that’s successful, earnings should do well, costs should be low, productivity should be high, and you should see the earnings—in this case, yes, […?] earnings do very well—and you should expect to see jobs growth do very poorly, especially non-firm payroll jobs, because that’s the establishment survey; that’s kind of a big company survey, as opposed to a household survey, which is all of us and whether we found work or not, sixteen, eighteen hours or more in the past month.
And lo and behold, in Figure 9, what you see is, in this last episode, the best performance since the beginning of the recovery of the S&P 500 operating earnings since we have had this concept--it doesn’t go back that far—and look at the performance of non-firm payrolls. Superficial, not totally conclusive evidence that the maximizing shareholder value mantra is working, incenting companies not to hire.
The story I tell—and I’m actually going to close on this, because I’m running low on my time, and invite you to look at Table 2, which shows one of the great substitutions that companies use to keep workers from working. It’s this free and easy technology-cheap, the new new technology. If you look at the inflow capital, inflow tech capital stock, information processing, ratio of capital to labor and equipment to labor in Table 2, you see a soaring of the ratio. Equipment was 1 in 1998; it’s now 1.52; that’s our latest data for 2010. And information processing, which is growing like top seed [Topsy?], in 1998 was .24; now it’s .55. The substitution of robots--it’s everything, voice-- The substitution of capital for labor is very pronounced, and it’s exactly what shareholder value maximizing should do.
Well, I don’t have any solutions. I think for any of this, in terms of the what, I can’t resist closing on the following with a bit of a story to eat up the rest of my time. It has to do with Lou Gerstner, who’s one of those great executives that made a lot of money, and the companies he went to, including particularly IBM. He’s a [McKinsian] company guy. I worked with him at American Express, and I can tell you, this guy knows about controlling expenses and then finding ways to grow the company.
So when he went to IBM, the joke I told, because I think the phenomena that I’m talking about started, I first started to notice it post-’90-91, where we had this oddball decline in jobs after the recovery began, and that wasn’t supposed to be what happens. So the question was why. And that’s when the notion or the hypothesis that maximizing shareholder value was causing different behavior took root in my research thinking.
So when he went to IBM I said, well, you know, I think if I’m Lou Gerstner—by the way, I know him, I can tell this story, he’s heard this story, he laughs when he hears it—if I’m Lou Gersten and I go to IBM, I’m going to fire my mother the minute I get in because the stock market the next day will reward me so well for firing my mother in terms of my options and my restricted stock, that is the stock price will go up, that I will be able to take care of my mother in the manner to which she should be accustomed.
I told this story at—it’s the Hebrew Center in Martha’s Vineyard to an older crowd of retired people. It’s called the Hebrew Center, but they weren’t all Jewish, but this story kind of resonates a little more with Jewish people in terms of taking care of your mother. Woody Allen—you know the stories about Allen, what the mother did to Woody Allen. And so I told this story, and of course I got the laugh I always get.
Three days later I was sitting in a little corner of a small place in Martha’s Vineyard having a cappuccino where nobody ever—I never see anybody I know—on purpose I go there. And a guy walks in, and he looks at me, and he says, Aren’t you the economist who spoke the other night? I said, Yah, did I cheer you up? And he said, No, but you know, you were wrong. I started to shake, because what could be worse for a forecaster than to be wrong. He said, It wasn’t his mother he fired; it was his brother, Richard. It’s a true story.
Lou’s a rich man now. I hope he’s taking care of his brother in the manner that Lou should take care of his brother.
James K. Galbraith:
Economists for Peace and Security