Re: Unemployment!


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(email exchange)

Thanks,

It’s all coming apart.

Need that full payroll tax holiday now!

(Treasury makes all contributions for employees and employers to keep the accounting in order)

>   
>   On Thu, Jan 8, 2009 at 2:27 PM, Morris wrote:
>   
>   It seems the problems with unemployment
>   claims system overload this week is even more
>   severe than we thought. To recap, NY state’s
>   internet and phone systems went down on
>   Monday due to unusually high applicant
>   volumes. Ohio and North Carolina had volume-
>   related problems that caused their internet
>   system to go down, Kentucky’s system
>   crashed, Massachusetts reported problems
>   getting through for thousands of callers and
>   internet filers and New Mexico, Pennsylvania,
>   Oklahoma and Washington all added additional
>   operators to deal with the spike in call volumes.
>   
>   To recap, all of these problems happened this
>   week, so they will affect next Thursday’s
>   report, not this morning’s. They suggest an
>   unusual spike in layoffs which suggests the
>   difficulty seasonally adjusting data around the
>   year-end holidays may have caused the claims
>   data of the past two weeks to be understated.
>   
>   Based on a quick web search, we could not
>   find any evidence of similar problems in the
>   past.
>   
>   Thanks to all of you who sent links.
>   


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Buy this book!


[Skip to the end]

Full Employment Abandoned

Shifting Sands and Policy Failures


by William Mitchell, Professor of Economics, Centre of Full Employment and Equity, University of Newcastle, Australia and Joan Muysken, Professor of Economics, CofFEE-Europe, University of Maastricht, The Netherlands

My review:

There are only 2 books that I know of that are ‘in paradigm’ and the other is Wray’s ‘Understanding Modern Money’ which I also highly recommend.

This new book by Bill Mitchell is also solidly ‘in paradigm’ and for those of you not all that interested in the details of unemployment per se I suggest beginning with ‘Part III’ which does an outstanding job of outlining the imperatives of non convertible currency which will serve you well in analyzing today’s markets. From monetary operations to fiscal measures, the mainstream economists and media continue to get it wrong. Bill lays down the fundamentals that can help you understand where the mainstream goes astray, and hopefully translate into you getting it right.

Regarding unemployment (aka the ‘output gap’ by today’s central bankers), it is readily acknowledge that inflation isn’t all that sensitive to changes in unemployment. In their words, “The good news is that the Phillips curve is flat. And the bad news is that the Phillips curve is flat.” The essence of what Bill proposes is that an employed labor bufferstock is a far superior price anchor than today’s labor bufferstock of unemployed. And this is one of those things that seems obvious and indeed is absolutely correct, yet entirely overlooked as a policy option.

So click and order a copy or two, jump to Part III, and then start at the beginning to get a leg up on where we are, how we got here, and what policy options are open- particularly a form of full employment that further supports output, growth, and price stability.

Then pass it around your office and send copies to your favorite members of Congress, thanks!

Order now: http://www.e-elgar.co.uk/Bookentry_Main.lasso?id=1188
 
 
Warren Mosler
 
 
 
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Publisher’s Spiel:

“This book by William Mitchell and Joan Muysken is both important and timely. It deals with the issue of the abandonment of full employment as an objective of economic policy in the OECD countries. It argues persuasively that macroeconomic policy has been restrictive over the recent, and not so recent past, and has produced substantial open and disguised unemployment. But the authors show how a job guarantee policy can enable workers, who would otherwise be unemployed, to earn a wage and not depend on welfare support. If such a policy is fully supported by appropriate fiscal and monetary programmes, it can create a full employment with price stability, and which the authors label as a
Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). This book is essential reading for any one wishing to understand how we can return to full employment as the normal state of affairs.”
-Philip Arestis, University of Cambridge, UK

Contents:

Part I: Full Employment: Changing Views and Policies

  1. The Full Employment Framework and its Demise
  2. Early Views on Unemployment and the Phillips Curve
  3. The Phillips Curve and Shifting Views on Unemployment
  4. The Troublesome NAIRU: The Hoax that Undermined Full Employment

Part II: Full Employment Abandoned: Shifting Sands and Policy Failures

  1. The Shift to Full Employability
  2. Inflation First: The New Mantra of Macroeconomics
  3. The Neglected Role of Aggregate Demand

Part III: The Urgency of Full Employment: Foundations for an Active Policy

  1. A Monetary Framework for Fiscal Policy Activism
  2. Buffer Stocks and Price Stability
  3. Conclusion: The Urgency of Full Employment References Index


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Another look at Kohn’s June 11th speech


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This still reads hawkish to me:

The results of such exercises imply that, over recent history, a sharp jump in oil prices appears to have had only modest effects on the future rate of inflation. This result likely reflects two factors. First, commodities like oil represent only a small share of the overall costs of production, implying that the magnitude of the direct pass-through from changes in such prices to other prices should be modest, all else equal. Second, inflation expectations have been well anchored in recent years, contributing to a muted response of inflation to oil price shocks. But the anchoring of expectations cannot be taken as given; indeed, the type of empirical exercises I have outlined reveal a larger effect of the price of oil on inflation prior to the last two decades, a period in which inflation expectations were not as well anchored as they are today.

Nonetheless, repeated increases in energy prices and their effect on overall inflation have contributed to a rise in the year-ahead inflation expectations of households, especially this year. Of greater concern is that some measures of longer-term inflation expectations appear to have edged up since last year. Any tendency for these longer-term inflation expectations to drift higher or even to fail to reverse over time would have troublesome implications for the outlook for inflation.

The central role of inflation expectations implies that policymakers must look beyond this type of reduced-form exercise for guidance. After all, the lags of inflation in reduced-form regressions are a very imperfect proxy for inflation expectations. As emphasized in Robert Lucas’s critique of reduced-form Phillips curves more than 30 years ago, structural models are needed to have confidence in the effect of any shock on the outlook for inflation and economic activity.

This was considered the dovish part:

In particular, an appropriate monetary policy following a jump in the price of oil will allow, on a temporary basis, both some increase in unemployment and some increase in price inflation. By pursuing actions that balance the deleterious effects of oil prices on both employment and inflation over the near term, policymakers are, in essence, attempting to find their preferred point on the activity/inflation variance-tradeoff curve introduced by John Taylor 30 years ago.

So the question is whether that point was realized by a 2% Fed funds rate currently?

Such policy actions promote the efficient adjustment of relative prices: Since real wages need to fall and both prices and wages adjust slowly, the efficient adjustment of relative prices will tend to include a bit of additional price inflation and a bit of additional unemployment for a time, leading to increases in real wages that are temporarily below the trend established by productivity gains.

But it was then qualified by this return to hawkishness regarding the inflation expectations that he previously said showed signs of elevating:

I should emphasize that the course of policy I have just described has taken inflation expectations as given. In practice, it is very important to ensure that policy actions anchor inflation expectations. This anchoring is critical: As demonstrated by historical experiences around the world and in the United States during the 1970s and 1980s, efforts to bring inflation and inflation expectations back to desirable levels after they have risen appreciably involve costly and undesirable changes in resource utilization.11 As a result, the degree to which any deviations of inflation from long-run objectives are tolerated to allow the efficient relative price adjustments that I have described needs to be tempered so as to ensure that longer-term inflation expectations are not affected to a significant extent.

And the FOMC all agree that long term inflation expectations have been affected to some extent already.

Summary
To reiterate, the Phillips curve framework is one important input to my outlook for inflation and provides a framework in which I can analyze the nature of efficient policy choices. In the case of a shock to the relative price of oil or other commodities, this framework suggests that policymakers should ensure that their actions balance the deleterious economic effects of such a shock in the short run on both unemployment and inflation.

Of course, the framework helps to define the short-run goals for policy, but it doesn’t tell you what path for interest rates will accomplish these objectives. That’s what we wrestle with at the FOMC and is perhaps a subject for a future Federal Reserve Bank of Boston conference.

This all could mean a Fed funds rate that causes unemployment to grow and dampen inflation expectations down, but not grow so much as to bring inflation down quickly is in order.

The question then is whether the appropriate Fed funds rate for this ‘balance’ between growth, employment, and inflation expectations is 2% or something higher than that.

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2008-06-19 EU News Highlights


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Highlights

Italian Unemployment Rate Rises for First Time Since 2003

Euro Central bankers think that’s a good thing for their fight against inflation. Unemployment was getting far too low for comfort.

France’s Woerth Maintains Economic Growth Forecast at 1.7%-2%

More than enough to warrant rate hikes.

French government wants more work hours

Trying to add supply to labor markets to keep wages ‘well contained.’

Zapatero Says Spain Suffering an ‘Abrupt Slowdown’

Spain had been growing too fast for comfort for the inflation hawks


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Reuters: payrolls and the output gap

U.S. Feb payrolls drop for second straight month

by Glenn Somerville

U.S. employers cut payrolls for a second straight month during February, slashing 63,000 jobs for the biggest monthly job decline in nearly five years as the labor market weakened steadily, a government report on Friday showed.

The Labor Department said last month’s cut in jobs followed an upwardly revised loss of 22,000 jobs in January instead of 17,000 reported a month ago. In addition, it said that only 41,000 jobs were created in December, half the 82,000 originally reported.

December was first reported as a ‘very weak’ 17,000 increase, revised to up 82,000 a month later (not ‘as originally reported’ as above) and now further revised to up 41,000.

These are substantial swings with current market sensitivities, and January and February will likely be further revised next month.

At the same time, the unemployment rate fell to 4.8%. The previous increases corresponded to an unexpected jump in the labor force participation rate, which has now fallen back some in line with Fed expectations.

The Fed has long been anticipating that demographic forces would reduce the labor force participation rate and thereby tighten the labor markets.

That is, we are running out of people to hire; so, new hires fall while the unemployment rate stays the same or goes down.

The last several months are consistent with this outlook, and it means the output gap isn’t all that large, as 4.75% unemployment is deemed by the Fed to be full employment with anything less further driving up inflation.

All this makes things more difficult for the Fed:

  • Stagnant GDP
  • Declining labor force
  • Very small output gap
  • Dangerously rising inflation

Without a major net supply response (a 5+ million bdp jump in crude or crude substitutes or drop in demand), crude prices will likely continue to rise. The drop in net demand for OPEC crude that cuased the price to break was about 15 million bdp in the 1980s, for example.

Will the cure be worse than the disease?

Will the cure be worse than the disease?

Right, the financial press will chop the Fed to ribbons if inflation continues higher, as I expect it will.

But Bernanke is setting the stage for an even bigger recession down the road. Just as the ultra-low rates of the early 2000s created many of the problems we’re experiencing today, pumping money into the system would probably stoke inflation, forcing the Fed to hike rates sharply in the near future. “It’s better to take a small recession and kill inflation immediately instead of facing high inflation and a really big recession later,” says Carnegie Mellon economist Allan Meltzer.

That’s the orthodox mainstream view. They are already starting to turn on Bernanke and his reinvention of monetary policy.

Meltzer, who is finishing the second volume of his history of the Federal Reserve, warns that Bernanke is risking a disastrous replay of the 1970s, when high oil prices fueled double-digit inflation. Every time the Fed started to tighten and unemployment jumped, chairmen G. William Miller and Arthur Burns lost their nerve. They lowered rates to boost job growth, and inflation inevitably revived, causing a vicious price spiral. The Fed let the disease rage for so long that it took draconian action by chairman Paul Volcker in the early 1980s to finally defeat inflation. The price was a deep recession, with unemployment hitting 11% in 1982. “The mentality is the same as in the 1970s,” says Meltzer. “‘As soon as we get rid of the risk of recession, we’ll do something about inflation.’ But that comes too late.”

Yes, that’s the mainstream story (not mine, of course) and likely to get a lot louder, and if inflation picks up, it could cost Bernanke his job.

Indeed, while the economy is sending mixed messages about growth, the signs of increasing inflation are flashing bright red. For 2007 the consumer price index rose 4.1%, the biggest annual increase in 17 years. Gold, historically a reliable harbinger of inflation, set an all-time high of more than $900 an ounce. The dollar is languishing at a record low against the euro and a weighted basket of international currencies. “Flooding the market with liquidity is a disaster for the purchasing power of the dollar,” says David Gitlitz, chief economist for Trend Macrolytics.

And the Fed knows this. And they know they are ‘way out of bounds’ of mainstream theory with current policy, including encouraging a fiscal package.

The Fed’s supporters tend to downplay those dangers. They contend that the inflation surge is being driven largely by energy costs. Since oil isn’t likely to rise from its near-$100 level, inflation is likely to tail off in 2008. “That argument is wrong,” says Brian Wesbury, chief economist with First Trust Portfolios, an asset-management firm. “As people spend less to drive to the golf course, they will spend the extra money on golf clubs or other products. The Fed wants to reflate the economy, so the money that went into higher oil prices will drive up the prices of other goods.”

That’s the mainstream story, and it’s lose/lose for the Fed.

Fed supporters also point out that the yield on ten-year Treasury bonds stands at just 3.8%, a figure that implies that investors expect inflation to be around 2% in future years. So if inflation is really expected to rage, why aren’t interest rates far higher? The explanation is twofold. First, government bonds are hardly a foolproof forecaster. For example, five years ago Treasury yields were predicting 2% inflation over the next five years, and the actual figure was 3%, or 50% higher.

Another point the mainstream will make: Fed foolishly relied on its forecasting models and ignored the obvious signs of inflation.

Second, investors are so skittish about most stocks and corporate bonds that they’re paying a huge premium for safe investments, chiefly U.S. Treasuries. “It’s all about a flight to safety,” says Meltzer. Stand by for a major rise in yields as the reality of looming inflation sinks in.

So what is the right course for the Fed? Bernanke should hold the Fed funds rate exactly where it is now, at 4.25%. Standing pat might well push the economy into a recession. But the Fed’s newfound vigilance on inflation would boost the dollar, effectively lowering the prices of oil and other imports. America would suffer a short downturn and restore price stability, paving the way to a strong recovery in 2010 or 2011.

Sadly, the Fed has already chosen sides. It’s likely to lower rates every time growth slows or joblessness rises. As a result, it will never tame inflation until it becomes a clawing, bellowing threat. Then we’ll have to suffer a real recession, the kind we suffered in the aftermath of a time we should study and shouldn’t forget – the 1970s.

Says it all.

Hard to say why the Fed hasn’t played it that way, but they haven’t and will pay the price if inflation keeps rising.


♥

Re: meltdown?

(an interoffice email)

> … He’s here w/me now & also is very concerned over the entire
> spectrum, especially all the 5/1 ARM’s & 2nd mgtg paper most
> refinancing this year. Ie: orginally good credits, now not. A ton of
> 5/1 Arm paper was done w/ escalations up 40/50% payment wise.

Presumably the borrowers qualified at the time based on the higher payments?

And I see refi’s ratcheting up nicely. Unemployment is about the same, incomes are up, so most borrowers should qualify for refis,
apart from the ones that slipped by with substandard credit in the first place?

> Guess w/these Insurance Cos being downgraded tomorrow will be BLACK Tuesday.
> So, how do we fix a crisis of CONFIDENCE? BB isn’t too convincing these days.

The risk is mark to market risk if there is forced selling by investors that must have rated credits and were relying on the insurance to comply with their ratings criteria.

Forced selling is disruptive for sure- sellers lose, buyers gain as prices go lower than economic and/or recovery value.

Not much the Fed or Congress can do apart from bailing out the bond holders by taking over some piece of the insurance, and operationally it’s hard to see them doing that on a timely basis. But it would ‘cost’ the govt. a relatively small amount of $ to do that, as first loss would still be the shareholders of the ins. companies, and the govt could insure maybe only 95% of the rest, limiting default losses for bond holders to 5 pts max, for example.

As before, none of this directly alters the real economy, apart from psychological effects that might slow demand for a while. This much like the crash of 87- large financial losses but the real economy muddled through until the Bush tax hikes…

All the best!

warren

A very British bubble for Mr Brown

A very British bubble for Mr Brown

Leader
Sunday December 16 2007
The Observer

The buzz words in the world of finance these days are ‘moral hazard’. That is economist-speak for what happens when people who have engaged in risky business and fallen foul of market forces are let off the hook. It is the recognition that when you give dodgy lenders and borrowers an inch, they recklessly gamble for another mile.

When the City started to feel the ‘credit crunch’ over the summer, the Bank of England at first took a tough line on moral hazard. But it subsequently changed its mind. It rescued Northern Rock.

It rescued the depositors. Hardly a moral hazard issue. The shareholders still stand to lose if the assets don’t have the hoped for cash flows over time.

Last week it joined a coordinated action with US, Canadian and European central banks to provide easy credit to any institution that can’t borrow elsewhere.

Sort of, the CB’s job is to administer policy interest rates. And, again, there is nothing yet to indicate shareholders are getting baled out.

That was the right course of action. The banking sector may be in a mess of its own making – it over-exposed itself to US sub-prime mortgages – but the danger to the wider economy of a prolonged cash drought is too big to ignore.

What is a ‘cash drought’???

But even if last week’s intervention gets the wheels of global finance moving again,

Whatever that means. GDP seems to be muddling through as before.

the danger will not have receded. That is because high street lenders have no reason to pass central bank largesse onto their customers. Ordinary people will still find it hard to borrow and will still pay more than before to service their debts.

Haven’t seen any evidence of that, apart from would be subprime borrowers who perhaps never should have had access to funds anyway.

Since Britons are some of the most indebted people in the world, that puts us in a particularly vulnerable position. Per capita, Britons borrow more than twice as much as other Europeans. The average family pays 18 per cent of disposable income servicing debt. If the world economy slumps, the bailiffs will knock at British doors first.

More confused rhetoric. Aggregate demand is about spending. The risk to output and employment remains a slump in spending.

It might not come to that. The best case scenario envisages a mild downturn, consumers turning more prudent, demand dipping and inflation falling, which would free the Bank of England to cut interest rates and re-energise the economy for a prompt comeback.

No evidence cutting rates adds to demand in a meaningful way. It takes a strong dose of fiscal for that or for the non resident sector to start spending its hoard of pounds in the UK.

But in the worst case scenario, the credit crunch turns into a consumer recession.

If it results in a cut in aggregate demand, which it might, but somehow this discussion does not get into that connection.

House prices fall dramatically. People feel much poorer and stop spending.

OK, there is a possible channel, but it is a weak argument. Seems to take a cut in income for spending to fall.

Small businesses can’t get credit and fold.

Could happen, but if consumers spend at the remaining businesses that do not fold and employment and income stays constant, GDP stays pretty much the same.

But high fuel and commodity prices keep inflation high. Unemployment rises

When that happens, it is trouble for GDP, but he skirts around the channels that might lead to a loss of income, spending, and employment.

and millions of people default on their debts. Boom turns to bust.

Right, and the policy response can be an immediate fiscal measure that sustains demand and prevents that from happening.

The problem is with ‘high inflation’ and an inherent fear of government deficits; policy makers may not want to go that route.

The government can hope for the best, but it must prepare for the worst.

Fallout shelters?

That means talking to banks, regulators and debt relief charities to work out ways to help people at risk of insolvency.

Actually, bankruptcy is a means of sustaining demand. Past debts are gone and earned income goes toward spending and often spending beyond current income via new debt.

They must look first at reform of Individual Voluntary Arrangements. These are debt restructuring packages that fall short of personal bankruptcy declarations. In theory, they allow people to consolidate and write off some of their debt, paying the rest in installments.

This could hurt demand unless the installment payments get spend by the recipients.

There is no debtors prison over there anymore, last I heard?

But in practice they are sometimes scarcely more generous than credit card balance transfer deals, with large arrangement fees and tricky small print. There is emerging evidence they have been mis-sold to desperate debtors.

In theory, individuals can also negotiate debt relief directly with banks. But that requires the pairing of a financially literate, assertive consumer with a generous-hearted lender – not the most common combination. The government and banks should already be planning their strategy to make impartial brokering of such deals easier.

But the first hurdle on the way to easing a private debt crisis is political. Gordon Brown has constructed a mythology of himself as the alchemist Chancellor who eliminated the cycle of boom-and-bust from Britain’s economy. To stay consistent with that line, he has to pretend that Britain is well insulated from financial turbulence originating in the US.

Banning CNBC would help out a lot!

That simply isn’t true. The excessive level of consumer borrowing in recent years is a very British bubble and the government can deny it no longer. If the bubble bursts, we will face a kind of moral hazard very different from the one calculated by central banks when bailing out the City. It is the hazard of millions of people falling into penury.

Rising incomes can sustain rising debt indefinitely. It is up to the banks to make loans to people who can service them; otherwise, their shareholders lose. That is the market discipline, not short term bank funding issues.