EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

[NCR85]

http://www.epi.org/publication/ib333...eat-recession/

- about two thirds of the decline in US labor force participation was in excess of the expected fall based on the 1989 to 2007 trend.
- when these presumably involuntary labor force dropouts due to cyclical factors (i.e. recession and its aftermath) are counted among the unemployed, the 2011 U-3 unemployment rate would be 10.7% as opposed to 8.9%; virtually no improvement since the 2009 trough

Found via Dean Baker's CEPR:
http://www.cepr.net/index.php/blogs/...ull-employment

(great analytical synopsis of US labor force statistics)

Notice especially:

Quote:

Originally Posted by CEPR But even this understates the damage. The December 2007 rates of employment and labor force participation were themselves hangovers from the previous (2001) recession. A better threshold would be that of effectively full employment, akin to the conditions we enjoyed in the late 1990s.

See also:
http://globaleconomicanalysis.blogsp...icipation.html

Which puts the percentage at 76%; painting an even more negative picture.

[ASH]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

Originally Posted by CEPR
But even this understates the damage. The December 2007 rates of employment and labor force participation were themselves hangovers from the previous (2001) recession. A better threshold would be that of effectively full employment, akin to the conditions we enjoyed in the late 1990s.

I tend to think that the "full employment" we enjoyed in the late 1990's were a product of a credit bubble (the dot-com bubble) as was the 2007 employment baseline (the housing bubble), and as such, they don't make very good reference points. I think the "hangover" is actually a reversion to a secular trend in employment and wages caused by globalization and technical progress. It seems to me that the "new normal" of lower employment rates and stagnating wages were temporarily masked by credit-bubble-driven growth, and those credit bubbles were enabled by monetary and regulatory policies whose purpose was to increase employment... but the dependence on excessive credit growth carried the seeds of the subsequent recessions.

[Chomsky]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

I tend to think that the "full employment" we enjoyed in the late 1990's were a product of a credit bubble (the dot-com bubble) as was the 2007 employment baseline (the housing bubble), and as such, they don't make very good reference points. I think the "hangover" is actually a reversion to a secular trend in employment and wages caused by globalization and technical progress. It seems to me that the "new normal" of lower employment rates and stagnating wages were temporarily masked by credit-bubble-driven growth, and those credit bubbles were enabled by monetary and regulatory policies whose purpose was to increase employment... but the dependence on excessive credit growth carried the seeds of the subsequent recessions.

+1

(and great to see you again, ASH)

[DRumsfeld2000]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

If that is the case, is not the conclusion then that unemployment will not fall to the FED's desired 6.5% without massive printing and so QE to infinity really will become a reality?

[ASH]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

Thanks, Chomsky! Good to see you, too!

[ASH]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

If that is the case, is not the conclusion then that unemployment will not fall to the FED's desired 6.5% without massive printing and so QE to infinity really will become a reality?

With the caveat that my head hasn't been in the econ game for many months, I noticed a headline about household debt service go by recently. The Fed calculates a financial obligations ratio for debt service costs plus automobile leases, rent, homeowner's insurance, and property tax to disposable income for representative American households. In the third quarter of 2012, the FOR dropped to 15.74. By contrast, it peaked at 18.97 in the third quarter of 2007... prior to a whole bunch of deleveraging. In fact, the FOR hasn't been as low as 15.74 since the second quarter of 1984 ; it hasn't broken 16 since the fourth quarter of 1993 . I don't have any sophisticated understanding of how data for calculating the FOR is collected and manipulated, but if you take it at face value, it appears that households probably do have the capacity to start taking on debt again. Unlike 1984, when the federal funds rate was running in the 8.25% - 11.75% range (and had been even higher for several years prior), today's low FOR is probably closely connected to a very low federal funds rate and historically low mortgage rates, so the finance burden on households will no doubt rise with more normal monetary policy. However, my impression is that the Fed's low interest rate policy may start to get traction soon and spur more credit-fueled consumption, rather than pushing on the proverbial string, because household deleveraging has proceeded far enough to free up some income net of living expenses and debt service. If that's the case, then QE to infinity may not be required to push unemployment below 6.5%... rather, they may be able to take their foot off the gas and let credit growth do some work.

[ASH]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

A further thought about the QE: When growth finally does pick up, so will the velocity of money, and all those reserve deposits created by QE will finally be an issue for inflation. If that happens, the Fed will want to reverse their QE ("un-print" the money), but in so doing, Treasury bonds will move off the Fed's books (where the interest paid by the Treasury is refunded to the Treasury) and onto private books, increasing the federal government's financing costs. That could prove to be a strain in a time of tight budgets. It will also put a whole bunch of Treasurys out in the market, which won't be so great for the pricing of new issue.

[dcarrigg]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

A further thought about the QE: When growth finally does pick up, so will the velocity of money, and all those reserve deposits created by QE will finally be an issue for inflation. If that happens, the Fed will want to reverse their QE ("un-print" the money), but in so doing, Treasury bonds will move off the Fed's books (where the interest paid by the Treasury is refunded to the Treasury) and onto private books, increasing the federal government's financing costs. That could prove to be a strain in a time of tight budgets. It will also put a whole bunch of Treasurys out in the market, which won't be so great for the pricing of new issue.

Hey Ash! Good to see you again!

I just wanted to put some food for thought into this last statement.

What if there actually is policy coordination between the Treasury and the Fed? What if the ballooning federal deficit spending is just the tails side of the same coin as QE's heads? In that case, any agreement that comes out and looks to bring deficits in line with an axe would have to be timed right to coincide with a reduction in QE. Then ramp QE down as deficits ramp down. Then feed the Fed (along with everyone else who bought in) negative returns for about a decade to wipe the debt off of Uncle Sam's books.

The thought around town and before the re-election of our President was "QE through 2014." Now it is "QE is tied to employment." This small shift, but in my world, should not be taken lightly. It means something profound for all of these deficit commissions that Congress have kicking around. Let me explain:

Others have asked the question, "Since QE doesn't create jobs, why tie it to unemployment?" I think they're missing the fact that the following is probably the Fed's conception of what they're doing: QE creates a market for deficit spending on the cheap. Without deficit spending, there's austerity. With austerity, there's the loss of 2mm federal jobs and probably double that at non-profits and defense contractors. Ergo, QE saves jobs.

But what about creating jobs? Well, it probably will never do much of that this late in the game. It's not too politically feasible to turn open the spigot wider (stimulus). But it does box those who are calling for austerity in somewhat. It basically says, if you want government spending cuts, you'd better tie the timing of those cuts to employment.

There's the big policy shift. And the argument will go "If you truly believe that spending cuts in the public sector create jobs in the private sector, then put your money where your mouth is. Tie public sector spending cuts to employment levels. Then I'll sign the bill."
Of course, everyone knows that austerity never produced a job in its life, and certainly not in a recession.

What this means to me is that the end-game for QE may be farther off than any of us could possibly have rightfully been accepting just a couple of months ago. At least 2015. Maybe later. Maybe a lot later. The same goes for "serious spending cuts." They're probably not happening any time soon - at least not for the next two years. Barring some unlikely event, not for the next 4. So it's not even worth worrying about. The public debates are all kabuki.

That's really bad news for endowments and pension funds (nobody gets 7% with the funds rate at 0%). Rather bad news for capital hoarders and savers alike all around, actually. And I think it would seem to speak to the fact that we're going even deeper with the de-leveraging than we might have thought. But this whole scheme only works if the CPI rests just above the 10-year note anyhow. Otherwise Uncle Sam has to pay a real return on government debt. But low-and-behold, it is cheaper to borrow than to print, and will be for a while. Hence Op Twist, I think.



So that's the reader's digest version of how I'm thinking of things. But I think in reading it, you'll see why I'm not too worried about there being a glut of treasuries on the private market in a time of tight budgets.

[ASH]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

Hey Ash! Good to see you again!

Thanks, dcarrigg! Great to see you, too.

What if there actually is policy coordination between the Treasury and the Fed? What if the ballooning federal deficit spending is just the tails side of the same coin as QE's heads?

I have been thinking along similar lines, but I think the character of the coordination is that Congress curtails fiscal policy options, so the Fed implements its monetary policy with fiscal consequences in mind. The Treasury cannot decide, independent of Congress, to borrow or spend money, so in that sense there's nothing to "coordinate" overtly. However, the Fed can anticipate that the Treasury is going to have problems borrowing money if it needs to, and act to alleviate those difficulties; it can also increase the likelihood of Congress authorizing more spending by making the necessary borrowing look less risky.

Others have asked the question, "Since QE doesn't create jobs, why tie it to unemployment?" I think they're missing the fact that the following is probably the Fed's conception of what they're doing: QE creates a market for deficit spending on the cheap. Without deficit spending, there's austerity. With austerity, there's the loss of 2mm federal jobs and probably double that at non-profits and defense contractors. Ergo, QE saves jobs.

But what about creating jobs? Well, it probably will never do much of that this late in the game. It's not too politically feasible to turn open the spigot wider (stimulus). But it does box those who are calling for austerity in somewhat. It basically says, if you want government spending cuts, you'd better tie the timing of those cuts to employment.

I agree with you, but I also think there's an element of the Fed being chartered to influence employment, but not chartered to make borrowing easier for the Treasury. So one reason the Fed says it's printing money to boost employment is that there is no other acceptable answer for why it's printing, even if there are additional reasons. Also, I wouldn't entirely rule out conventional thinking regarding QE and nominal economic growth and jobs... my impression (largely from reading one of The Economist's economic columnists) is that many moderate-to-liberal conventional economists believe QE can raise inflation, and inflation will make real negative interest rates out of nominally zero interest rates, and that real negative interest rates will tend to get money off the sidelines and spur nominal economic growth... and that nominal economic growth will tend to raise employment. If the first and second rounds of QE were about propping up asset prices and arresting a deflationary spiral, a lot of the Fed's recent open-ended and conditional policies seem about shaping long-term expectations.

So that's the reader's digest version of how I'm thinking of things. But I think in reading it, you'll see why I'm not too worried about there being a glut of treasuries on the private market in a time of tight budgets.

I'm wondering if the Fed will end up getting more inflation than it wants sooner than the federal government's borrowing needs moderate. That's a situation in which the Fed would have to choose between keeping its balance sheet large and accepting high inflation or raising interest rates and causing the Treasury grief. Of course, I suppose the Fed could just change reserve fraction requirements if it really had to trim down the money supply without selling any Treasurys from its balance sheet.

[vinoveri]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

Thanks, dcarrigg!

I have been thinking along similar lines, but I think the character of the coordination is that Congress curtails fiscal policy options, so the Fed implements its monetary policy with fiscal consequences in mind. The Treasury cannot decide, independent of Congress, to borrow or spend money, so in that sense there's nothing to "coordinate" overtly. However, the Fed can anticipate that the Treasury is going to have problems borrowing money if it needs to, and act to alleviate those difficulties; it can also increase the likelihood of Congress authorizing more spending by making the necessary borrowing look less risky.


.

With all due respect, I think you're being too level headed and reasonable. To think that congress won't keep spending (or at least acquiescing) to the administration would seem inconsistent with what we have witnessed, especially over the last couple of weeks.

IMO the past 4 years have nothing but emboldened the authorities wrt deficit spending and money printing.
Like wages, the magnitude of deficit spending is likely to remain sticky (e.g., >$1 Trillion) indefinititely. The Feds/politicos have reaped no negative consequences from their actions and until they do, it is difficult for me to understand why they would stop. It is in fact a pretty good gig to be able to exert power and influence through "creating" money and doling it out how one pleases.

Should inflation start to heat up, we are likely to have a repeat of the 70's. The Fed will deliberately be behind the inflation curve, just to keep it from running away, and when it finally achieves its purpose after 8-10 years with a peak rate of 15-20% having inflated much of the debt away, the Volcker solution will come out and we'll be ready for another 30 yer debt bing (ala 1981-2007) with a lot of the debt having been retired and rates that can only go down.

No economic power around the globe wants the system to end and will juggle and do incrementally what is necessary to keep it going.
Financial Tyranny plain and simple IMO.

[ASH]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

With all due respect, I think you're being too level headed and reasonable. To think that congress won't keep spending (or at least acquiescing) to the administration would seem inconsistent with what we have witnessed, especially over the last couple of weeks.

IMO the past 4 years have nothing but emboldened the authorities wrt deficit spending and money printing.
Like wages, the magnitude of deficit spending is likely to remain sticky (e.g., >$1 Trillion) indefinititely. The Feds/politicos have reaped no negative consequences from their actions and until they do, it is difficult for me to understand why they would stop. It is in fact a pretty good gig to be able to exert power and influence through "creating" money and doling it out how one pleases.

Should inflation start to heat up, we are likely to have a repeat of the 70's. The Fed will deliberately be behind the inflation curve, just to keep it from running away, and when it finally achieves its purpose after 8-10 years with a peak rate of 15-20% having inflated much of the debt away, the Volcker solution will come out and we'll be ready for another 30 yer debt bing (ala 1981-2007) with a lot of the debt having been retired and rates that can only go down.

No economic power around the globe wants the system to end and will juggle and do incrementally what is necessary to keep it going.
Financial Tyranny plain and simple IMO.

That prognosis about our likely trajectory of debt, inflation, and interest rate policy seems realistic to me. My point was not that Congress will necessarily reign in spending before forced to do so. Rather, I was making the point that institutional coordination between the Department of Treasury and the Federal Reserve doesn't make as much sense as coordination between Congress and the Federal Reserve... except what I think is actually going on is the Fed trying both to make it easier for Treasury to scare up the funds that Congress wants to borrow and to make Congress more likely to want to borrow. Read my comment as a pedantic point about the Treasury not making fiscal policy, but rather playing a role in implementing it.

[santafe2]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

Here's what appears to be the FRED version of this chart. CPI YOY change appears more volatile in the FRED version.
CPI_10yrNote.gif

[don]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

Reading and viewing all of the above, it appears our economy cannot employ enough of our labor force. Could 30 years of neutering heavy industry and outsourcing white collars jobs be a factor . . .

[c1ue]

Re: EPI Labor Force Report: two thirds of labor force dropouts since 2007 are cyclical

The Feds/politicos have reaped no negative consequences from their actions and until they do, it is difficult for me to understand why they would stop. It is in fact a pretty good gig to be able to exert power and influence through "creating" money and doling it out how one pleases.

I think this is part of it.

The other part is no political party wants to be the one which 'bites the bullet' to stop the policies which are 'propping up' our economy - or more correctly - propping up the economy so the banksters can continue sucking off it.

Now that Obama is a lame duck, theoretically the likelihood of acting statesmanlike is greater, but in reality it will not be so given both his background and history - added to the 3 or 4 decades of earning power he has awaiting him.