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Economic Outlook: Why to NOT Raise The Social Security Retirement Age–Labor Force Participation and the “Life-Cycle of Employment”

Original article, courtesy of Politifact:

During the Republican presidential debate in North Charleston, S.C., Sen. Ted Cruz, R-Texas, took aim at the nation’s economic record under President Barack Obama.

“The millionaires and billionaires are doing great under Obama,” Cruz said. “But we have the lowest percentage of Americans working today of any year since 1977. Median wages have stagnated. And the Obama-Clinton economy has left behind the working men and women of this country.”

Cruz is on to something. One key employment statistic known as the civilian labor force participation rate is at its lowest level since the 1970s. This statistic takes the number of Americans in the labor force — basically, those who are either employed or who are seeking employment and divides it by the total civilian population.

Here’s a chart going back to the mid 1970s.

When the civilian labor force participation rate is low, it’s a concern, because it means there are fewer working Americans to support non-working Americans.

…a notable factor in the decline of the labor-force participation rate is the aging of the Baby Boom generation. As more adults begin moving into retirement age, the percentage of Americans who work is bound to decline.

…there’s another way to read Cruz’s words. He said “the lowest percentage of Americans working” since 1977, which could also refer to a different statistic, the employment-population ratio. This statistic takes the number of people who are employed and divides it by the civilian population age 16 and above.

The difference in this case is that using the employment-population ratio, Cruz’s statement is incorrect. Unlike the labor-force participation rate, the employment-population ratio has actually been improving in recent years, although it’s below its pre-recession highs.

Here’s a chart showing this statistic over the same time frame:

If you exclude the Great Recession, the employment-population ratio was last at its current rate in 1984, not 1977.  So by that measurement, he’s close.

(Note: this blog will not meaningfully address the other major labor market issue raised by Senator Cruz–stagnant wages. Nor will it discuss strategies to alter America’s aging demographic. The primary focus is labor force participation by different age groups, the relationship between older workers staying in the workforce longer and youth unemployment, and how those issues are related to America’s Social Security system.

It is not my intention to spark inter-generational warfare, but rather to point out that a “fix” commonly floated to bring America’s fiscal house in order–raising the Social Security eligibility and retirement ages–could have significant unintended negative consequences).

A declining labor force participation rate is worrisome. Even the more positive statistic (employment-population ratio) is cause for concern.

But as important as what is happening, is why it is happening. Failure to accurately answer this question risks the wrong policy response, which would at best fail to solve the problem and at worst further exacerbate it. The conservative camp would undoubtedly focus on the welfare state and disincentives to work. The liberal camp would probably focus on economic inequality and the resulting lack of opportunity facing many poor, mostly minority youths.

I am not interested in getting into a partisan debate, although my regular readers know which side I generally fall on. What neither side is likely to consider (because it does not fit neatly into either economic narrative) is in what age ranges most of the employment to population ratio change has taken place. To shed some light on this, lets look at a recent analysis done by the Bureau of Labor Statistics (The BLS numbers use the 16 and older employment-population ratio definition. In the interest of full disclosure, I work for the BLS, but not in any employment statistics capacity. Furthermore, the views expressed in this blog are my own, and are not the views of the BLS).

Group Participation rate Percentage-point change
1994 2004 2014   1994–2004 2004–14  
Total, 16 years and older 66.6 66.0 62.9 -0.6 -3.1
16 to 24 66.4 61.1 55.0 5.3 -6.1
16 to 19 52.7 43.9 34.0 -8.8 -9.9
20 to 24 77.0 75.0 70.8 -2.0 -4.2
25 to 54 83.4 82.8 80.9 -0.6 -1.9
25 to 34 83.2 82.7 81.2 -0.5 -1.5
35 to 44 84.8 83.6 82.2 -1.2 -1.4
45 to 54 81.7 81.8 79.6 0.1 -2.2
55 and older 30.1 36.2 40.0 6.1 3.8
55 to 64 56.8 62.3 64.1 5.5 1.8
55 to 59 67.7 71.1 71.4 3.4 0.3
60 to 64 44.9 50.9 55.8 6.0 4.9
60 to 61 54.5 59.2 63.4 4.7 4.2
62 to 64 38.7 44.4 50.2 5.7 5.8
65 and older 12.4 14.4 18.6 2.0 4.2
65 to 74 17.2 21.9 26.2 4.7 4.3
65 to 69 21.9 27.7 31.6 5.8 3.9
70 to 74 11.8 15.3 18.9 3.5 3.6
75 to 79 6.6 8.8 11.3 2.2 2.5
75 and older 5.4 6.1 8.0 0.7 1.9
Age of baby boomers 30 to

48

40 to

58

50 to

68

The change in labor force participation seems to have been driven primarily by:

  1. Fewer younger people working
  2. More elderly people working

In fact, the decline of prime working age labor force participation (say 25-55) over the last 20 years has been quite small.

It is true that once you get to the older age brackets (especially 60+), the group represents a smaller percentage of the overall population (see Table 1), so you cannot compare different groups percent changes directly. But even factoring in percentage of the total population, increases in elderly workers have had a significant impact on overall employment. As America’s population continues to get older, it will have an even greater impact:

age distribution over time

Furthermore, according to BLS Employment Projections (2014-2024), these age related labor trends are expected to continue into the future:

The labor force participation rate for youth (ages 16 to 24) is projected to
     decrease from 55.0 percent in 2014 to 49.7 percent in 2024. The youth age
     group is projected to make up 11.3 percent of the civilian labor force in
     2024 as compared with 13.7 percent in 2014. In contrast, the labor force
     participation rate for the 65-and-older age group is projected to increase
     from 18.6 percent in 2014 to 21.7 percent in 2024. This older age group is
     projected to represent 8.2 percent of the civilian labor force in 2024 as
     compared with 5.4 percent in 2014.

One could argue that older and younger people generally do not occupy the same job. Sometimes this is true, sometimes it is not. Furthermore, any given firm could have an older person making a lot of money in a position they intend to fill with more than one entry level worker. This is all anecdotal–without doing more research the exact relationship between older and younger workers and job openings is unknown–but surely there is some relationship (probably one that varies greatly by industry).

Next time a politician talks about raising the Social Security eligibility and retirement ages, consider:

  1. Poorer people (who rely on Social Security the most) are not living longer.
  2. Keeping people working longer means less jobs available to younger people. This also contributes to the exploding student loan debt problem in America (even those who do graduate college have a difficult time getting good paying jobs, at least partially because of competition from older, more qualified workers).

Both of these related issues–youth un(der)employment and student loan debt–create a drag on the economy, as younger people delay starting their “adult lives” (starting families, buying homes, etc.). This drag on the economic growth leads to–you guessed it–less job creation. Based on the BLS numbers, we clearly need to make youth employment a greater priority, as ignoring the problem compromises both current and future economic growth.

When we consider raising the Social Security eligibility age, we must consider unintended consequences. To responsibly increase the eligibility age, the government would have to launch a youth employment program. This could offset most (if not all) of the savings associated with raising the retirement age. Perhaps instead of raising the eligibility age, we should consider making social security a needs-based program, eliminating the cap on taxable income, or both. This may not be “fair” to people who have paid the most into the program (or those who have been more financially conservative throughout their lives), but it would make the Social Security system more financially sustainable, without the unintended negative consequences.

America does not  have to enact policies that exacerbate youth unemployment and/or discomfort poorer elderly people in order to save a few bucks. Our strong financial system and global faith in America’s creditworthiness ensures we can continue to finance important programs (for people of all ages) with long term economic implications. But this global faith in America’s creditworthiness is predicated on the belief that we can correctly identify and address our structural economic problems (and thus continue to grow and repay our debts). To preserve this faith, we must work across the partisan divide to responsibly and sustainably address these problems, not recycle stale partisan arguments that are largely unrelated to the problems at hand.

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The Greek Bailout Deal Is A Failure of Leadership in Both Greece and Germany

Kick-The-Can2

The terms of the 3rd bailout deal between Greece and its creditors brought a lot of issues to the forefront.

Silly me for thinking negotiations had to with economics–modernizing the Greek economy by enacting needed structural reforms, while providing the Greek government with the fiscal space needed to promote growth and address it’s pressing humanitarian crisis (which said structural reforms would only exacerbate in the short run). Instead, the defining elements of the deal were related to personality and politics.

The Germans were mad at the Greeks, so much so that German finance minister Wolfgang Schäuble said perhaps Greece might be better off leaving the Euro–this short-sighted self interest is not suitable behavior for Europe’s de facto leader. Tsipras’s government, for it’s part, apparently did not have a backup plan in case it’s creditors failed to offer a reasonable deal. I know Syriza is new to politics, but you don’t have to be a master negotiator to know that going into negotiations without a backup plan is a flawed strategy.

I was a fan of Tsipras’s government because of the interim agreement it secured in February–the potential for trading structural reforms for fiscal space. But since that point it terribly misplayed its hand. It went into negotiations without a backup plan. It held a referendum at least a month too late–the overwhelming “no” vote would have been a strong bargaining chip had Greece been able to take it back to the negotiating table while still covered under the terms of its prior bailout.

But once those terms expired, and Greek banks closed, the only choices for Greece were Grexit or capitulation. Since there was no plan in place for a Grexit, Greece ended up with the terrible deal it got. That deal–as it currently stands–fails in all regards: financial sustainability, growth prospects, and short term humanitarian concerns.

Not Financially Viable:

The International Monetary Fund threatened to withdraw support for Greece’s bailout on Tuesday unless European leaders agree to substantial debt relief, an immediate challenge to the region’s plan to rescue the country.

A new rescue program for Greece “would have to meet our criteria,” a senior I.M.F. official told reporters on Tuesday, speaking on the condition of anonymity. “One of those criteria is debt sustainability.”

The I.M.F. is now firmly siding with Greece on the issue. In a reportreleased publicly on Tuesday, the fund proposed that creditors let Athens write off part of its huge eurozone debt or at least make no payments for 30 years.

The I.M.F. said in its report that a write-down could be avoided, but only if creditors extended the schedule for Greece to repay its debt. The only other alternative to a haircut would be for the eurozone countries to give Greece the money it needs to repay them.

“The choice between the various options is for Greece and its European partners to decide,” the I.M.F. report said.

Greece would need to spend a sum equal to more than 15 percent of G.D.P. annually to pay interest and principal on its debt, according to the latest I.M.F. report.

Does Not Fulfill Greek’s Human Rights:

The implementation of new austerity measures in Greece amid the country’s deteriorating economic crisis must not come at a cost to human rights, a United Nations expert warned today as he urged international institutions and the Greek Government to make “fully informed decisions” before adopting additional reforms.

“I am seriously concerned about voices saying that Greece is in a humanitarian crisis with shortages in medicines and food,” Juan Pablo Bohoslavsky, the UN Independent Expert on foreign debt and human rights, stressed in a press statement today. “Priority should be to ensure that everybody in Greece has access to core minimum levels of economic, social and cultural rights, including the right to health care, food and social security.”

“A debt service burden that may be sustainable from a narrow financial perspective may not be viable at all if one considers the comprehensive concept of sustainable development, which includes the protection of the environment, human rights and social development,” he added.

And of course, as the IMF report highlights, the deal is not even “sustainable from a narrow financial perspective”.

Kicking the Can or Letting Heads Cool?

If Greece’s creditors, led by Germany, ultimately want to see Greece stay in the Eurozone (for the long run), a friendlier deal is needed. If a “Grexit”, with its short term pain but long term possibilities to return Greece to economic health, is indeed in Greece’s best option given what it’s creditors are willing to offer, why not take that tough medicine and let the healing start? The current deal represents the worst of both worlds–economic pain now and a likely Grexit in the future.

The one positive of this deal is that it did buy time, which should not be undervalued as “Grexit” would be permanent and have terrible geopolitical consequences. But  without stimulus (there are talks of a 35 billion euro stimulus fund by 2020 if reforms are fully implemented, but this may be too little too late) and debt restructuring (which cannot be ruled out, but also cannot be counted on), the deal is little more than kicking the can down the road–all while the Greek people continue to suffer.

Greece’s creditors cannot keep dangling future carrots while imposing fiscal restraints which hurt Greece’s already beleaguered citizenry in the here and now. Aid must be synced with structural reforms, or else the Greeks will see their situation go from terrible to worse and reject the terms of this 3rd bailout. 

Doing the same thing and expecting different results is the definition of insanity. Greece has tried to implement reforms in order to unlock future aid before, and we see where that got it--a severely contracted economy, depression level unemployment rates, and costly political instability. 

This is not the time for more business as usual; this is the time for bold action and trust between Greece and it’s creditors. Unfortunately nothing about the past few months of negotiations suggest this is outcome will be realized.

 


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Greece, Birthplace of Democracy, Needs A Democratic Lifeline

No More Blood From A Greek Stone:

It appears Greece’s government has come up with a list of reforms it and its creditors can agree upon in return for 4 months of bridge financing to restructure the conditions of a longer-term growth strategy.

By trading structural reforms for fiscal space, each major player (Greece and Germany) is making major concessions in the name of pragmatism. Germany is relaxing its dogmatic belief  in fiscal targets to provide the Greek government with the fiscal space needed to restructure its economy without exacerbating its “humanitarian crisis”. Greece, in return, must officially bring to an end the era of lax tax collection and over-rigidity in the labor market.

Both sides are making major concessions, neither side is 100% happy, and its appears as if middle ground has been found–all signs of a meaningful compromise. One can only hope that when Greece’s list of reforms comes in on Monday, both sides of this debate remain on the same page:

Greece’s list of reforms to be submitted to the euro zone on Monday comprises pledges on structural issues such as tax evasion and corruption over the next four months without specific targets, a government official said on Saturday.

The accord requires Greece to submit by Monday a letter to the Eurogroup listing all the policy measures it plans to take during the remainder of the bailout period.

If the European Commission, the European Central Bank and the International Monetary Fund are satisfied, the Eurogroup is likely to endorse the list in a teleconference without the need for a formal meeting. Then euro zone member states will need to ratify the extension, where necessary through their parliaments.

There will not be specific figures or targets to be achieved tied to the goals, the official said, adding that the two sides had not yet discussed how Greece would be evaluated on the reforms.

EU officials and euro zone ministers said they had no reason to think Greece would not come up with a satisfactory list of measures on Monday night. However, some hawkish countries have insisted that if there are doubts, the Eurogroup would have to reconvene in Brussels.

Structural reforms are inherently difficult to implement. In order to make the difficult task of taking on strong interest groups politically possible, an overwhelming popular mandate is needed. The need for strong public backing becomes even more important during times of high unemployment, when those lucky enough to remain employed are (quite rationally) more afraid of losing their jobs.

According to a recent opinion poll, 68% of Greeks want a “fair compromise” with the EU; even after years of economic suffering, the vast majority of Greeks remain steadfast in their believe in the E.U.. Such support must be seized upon, it will not last forever.

What Greece needs now is a pro-growth, structural reform based bailout plan, not a continuation of its failed blood-from-a-stone internal-devaluation based “recovery”. Reducing it’s primary surplus while collecting greater tax receipts would open up the fiscal space Greece needs to both deal with its humanitarian crisis and create a safety-net for those adversely affected by labor market reforms as the economy readjusts. 

The past 6 years have had a deep psycho-economic effect on the Greek people. With overall unemployment at 26% and youth unemployment at 50%, to go along with a 24% contraction in GDP, the Greek economy has been ravaged. Lack of control over monetary policy (as all members of the Eurozone face) has limited Greece’s policy space, it must be allowed to regain some control over fiscal policy.

Greeks have suffered enough and have learned their lessons–these next four months are an opportunity to prove it. In addition to any external monitoring imposed as part of this deal, the Greek people must prove they can be their own corruption watchdog and can pay their taxes.

Fighting wealthy tax evaders may be a popular political platform and merited on social justice grounds, but in order to pay-down Greek debt without compromising human development, a widespread cultural acceptance towards paying taxes is required. There is no doubt Greece has been too lax in collecting taxes in the past, but this does not need to be an irrevocable problem. Through legislative reform and social accountability, Greece can overcome it’s culture of tax evasion.

Locking in long-term labor market reforms, without driving more people into poverty and exacerbating the “lost generation” of young Greeks, should be the mutual goal between Greece and it’s creditors. In fact, this could be a potential blueprint for other economically depressed European countries to renegotiate their social contracts with the EU. Democratic governance derives its legitimacy from the will of the governed; if peoples basic needs are not met, democratic governance cannot be sustained.

Greece is not in the clear yet. But by finding this acceptable middle ground, the foundations of a sustainable solution for keeping the Eurozone intact may have been laid.

Reversing the Democratic Recession:

Neither side of this debate should have to pretend that keeping the Eurozone unified is an unimportant political, economic, foreign relations and security consideration. Greece staying in the E.U. is important for Greece, Germany, the E.U. and any country with aspirations of democratic governance:

[Stamford University democracy expert] Diamond adds, “perhaps the most worrisome dimension of the democratic recession has been the decline of democratic efficacy, energy, and self-confidence” in America and the West at large. After years of hyperpolarization, deadlock and corruption through campaign financing, the world’s leading democracy is increasingly dysfunctional, with government shutdowns and the inability to pass something as basic as a budget. “The world takes note of all this,” says Diamond. “Authoritarian state media gleefully publicize these travails of American democracy in order to discredit democracy in general and immunize authoritarian rule against U.S. pressure.”

If anything, the U.S. has been the poster-child for prosperity through democracy compared to the E.U.. Regardless, twin “democratic recessions” of varying degrees on both sides of the Atlantic have compromised the appeal of democratic governance abroad. Spreading Islamophobia, antisemitism, and xenophobia throughout Europe–side effects of Europe’s failed economic policies–compromise the appeal of Western values and galvanize authoritarian and extremist messages. 

ISIS finds itself at Italy’s back-door geographically in Libya. But ideologically, ISIS could not be further away from European ideals. Ultimately, reversing the democratic recession and countering authoritarian and extremist ideals requires. among other things, proving democracy remains a viable path to widespread freedom and prosperity.

“Western” countries cannot push Greece towards China / Russia for a bailout. We, like Greece, finds ourselves at an inflection point–we must  prove that democracy in a first world country can satisfy peoples basic needs. Failure to do so could lead to a long-term setback in promoting modernization, human rights, and democratic governance in the worlds least developed countries.


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Economic Outlook: Europe (Finally) Gets It’s Stimulus Program

Youth Unemployment Europe October 2013

After EU Parliamentary elections in late May, many people were concerned (or jubilant, depending on the circles you run in) about gains by anti-EU “Euroskeptic” parties. These parties did not gain enough seats to dictate policy, but they did gain a platform to push their agenda in future policy decisions.

For every action, their is a reaction. It seems that gains from anti-EU parties have refocused pro-European forces, forcing them to adopt more “people-friendly” policies to counter the depression level unemployment rates (which have hit young people particularly hard).

As any development economist will tell you, youth unemployment presents many unique problems, both individual (high depression rates, future income losses “wage scaring”) and societal (increases in criminal / anti social behavior, drags on economic growth).

Systematic under-investment in young people is short sighted economically and causes untold human suffering. Such under-investment, while always reprehensible, is not surprising in the worlds least developed countries (LDCs), but this is Europe we’re talking about here.

Europe’s leaders have responded with pragmatic policies in recent months (finally, it only took 5+ years!). In Early June, the European Central Bank took the unprecedented step of introducing negative interest rates for keeping deposits in the ECB, a policy likely to not be popular with people who have wealth to invest, but which nonetheless should help spark short-term economic growth.

In arguably more meaningful news, last week the European Parliament announced a “Public-Private” stimulus program:

Jean-Claude Juncker won a wide endorsement from the European Parliament on Tuesday to be the next head of the executive European Commission after setting out a “grand coalition” investment programme to help revive Europe’s economy.

Belying his reputation as a grey back-room fixer, Juncker spoke with passion of his ambition to “reindustrialise” Europe and put the European Union’s 25 million unemployed, many of them young, back into work.

He promised a 300-billion-euro ($409-billion) public-private investment programme over the next three years, combining existing and perhaps augmented resources from the EU budget and the European Investment Bank with private sector funds, to build energy, transport and broadband networks and industry clusters.

“We need a reindustrialisation of Europe,” the 59-year-old former Luxembourg prime minister said. He won support from the Socialists and Liberals as well as his own centre-right bloc, the largest in the EU legislature.

Juncker acknowledged many Europeans had lost confidence in the EU and said only economic results and full employment, not endless debate over EU institutions, would restore their trust.

…his emphasis on public investment, reaffirmation of a target of raising industry to 20 percent of EU economic output and call for a minimum wage in each EU country, were designed to appeal to the left.

In a speech delivered in French, German and English, Juncker sought to reassure Germany and other north European fiscal hawks that the 28-nation bloc’s strict rules on budget deficits and debt reduction would be maintained.

Juncker said euro zone countries should get financial incentives if they make ambitious structural economic reforms, funded by the creation of a separate budget for the 18 countries in the currency area.

He also vowed to protect public services in Europe from what he called “the whims of the age” – an apparent reference to privatisation and restrictions on state aid.

Europe’s stimulus act will not be a panacea. By all accounts, EU countries (with the exception of Germany) have recovered much more slowly from The Great Recession than the U.S. Unemployment remains too high, and is especially troubling in certain countries and demographics.

Compounding the problem, this stimulus budget is too small to adequately address the problems facing the EU. The American Reinvestment and Recovery Act (ARRA) was less effective than imagined largely because it wasn’t big enough, and it’s funds came in at almost twice as much as its European Counterpart ($831 billion vs. $490 billion).

However, only 2/3 of the ARRA was in the form of spending, while the remainder took the form of tax breaks (which, in the context in which it was passed, had a much lower “fiscal multiplier” than direct spending). The European program seems to be more spending focused, meaning dollar for dollar (or euro for euro) this smaller stimulus plan may go further in addressing the social and economic problems facing the EU. The EU plan also leverages public funds to stimulate private investment–Europe’s leaders are doing what they can given budgetary constraints barring a larger stimulus program.

Combined with the ECB’s negative interest rates, EU leadership is proving it has moved past “bleeding the patient” and is taking a more proactive approach to economic recovery. I know it is hard to get excited about European leadership learning lessons after 5+ years of policy failure, but better incomplete and late than never, right?

While generally well received, this program has its notable detractors, headed by “Euroskeptics”, fiscal hawks, and Britain. Britain and other non-Euro EU countries must make their own decisions about their future in the EU based on what they believe is in their country’s best interests. As French President Hollande said last year, “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.”

Sometimes you have to cut off the limb to save the patient. For the euro zone to survive, closer fiscal, taxation, and regulatory integration are needed. If Britain or any other country cannot accept this reality, they must seriously questions their future position within the EU (which, it seems, Britain will do with a membership referendum next year).

Leaving the EU need not be marked with retaliatory economic barriers or deteriorating political relationships; it could be done in a way that largely preserves existing interdependence while opening avenues for greater policy flexibility. As no country has ever left the EU, the punitive impacts of such a move are undecided. Like any breakup, it could be ugly and painful, or it could be clean and leave the possibility of “remaining friends”. 

 


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Economic Outlook: Shortsighted Austerity

https://i2.wp.com/img375.imageshack.us/img375/6475/cartoondeficits.gif

In the aftermath of the global economic crisis, more than 70 per cent of the world population is without proper social protections, the United Nations labour agency today reported, urging governments to scale up investment in child and family benefits, pensions and other public expenditures.

“The global community agreed in 1948 that social security and health care for children, working age people who face unemployment or injury and older persons are a universal human right,” said Sandra Polaski, Deputy Director-General of the International Labour Organization (ILO).

“And yet in 2014 the promise of universal social protection remains unfilled for the large majority of the world’s population.”

As many as 122 governments are contracting public expenditures in 2014, of which 82 are developing countries, according to the findings of the World Social Protection Report 2014/15: Building economic recovery, inclusive development and social justice.

“The case for social protection is even more compelling in these times of economic uncertainty, low growth and increased inequality,” Ms. Polaski added, noting that it is also an issue that the international community should embrace prominently in the development agenda following the Millennium Development Goals deadline in 2015.

At the beginning of the 2008-2009 economic crisis, at least 48 high- and middle-income countries put in place stimulus packages totalling $2.4 trillion that devoted roughly a quarter to social protection measures.

But from 2010 onwards, many governments reversed course and embarked prematurely on fiscal consolidation, despite the urgent need to continue supporting vulnerable populations and stabilizing consumption.

In the European Union, cuts in social protection have already contributed to increases in poverty which now affect 123 million people or 24 per cent of the population, many of whom are children, women, older persons and persons with disabilities, the ILO reported.

The report also shows that about 39 per cent of the world population lacks any affiliation to a health system or scheme. The number reaches more than 90 per cent in low-income countries.

The report also highlights the cases of Thailand and South Africa, which have achieved universal health coverage in just a few years, showing that it can be done.

“It is now a matter of political will to make it a reality. Modern society can afford to provide social protection,” Ms. Polaski stated.

Macroeconomic Implications:

The Macroeconomic implications of premature austerity are fairly straightforward. Keynesian national income accounting tells us that insufficient private demand can be compensated for with increased public spending (Y = C + I + G + M-X). For the world as a whole, net exports (X-M) are, by definition, 0. Therefore, when global private demand (consumption, “C”) goes down, it can be compensated for by only be increasing stimulus spending (or cutting taxes, but the economic multiplier of tax cuts is lower than for stimulus spending, especially in a liquidity trap when even near zero interest rates are insufficient to stimulate private demand to full employment levels).

If C and G are both insufficiently low, we get dangerously close to deflation–something almost every modernized economy is aggressively trying to avoid at the moment. High levels of debt and deflation causes a vicious economic cycle, where government spending cuts results in a higher level of “real” debt (even though the gross number associated with debt is reduced, the real value of that debt–what it can buy–goes up). This is one of the things that made the Great Depression so painful for so many people; as the programs that would have helped them were cut, the countries fiscal position worsened, leading to further cuts.

Microeconomic Implications:

It is the effect on people, on human development, that we truly care about here at Normative Narratives. In the context of high unemployment, one could see how cutting welfare programs, government jobs, etc. could be particularly painful on already vulnerable groups. I would need to conduct more in depth analysis of specific cuts in specific countries to speak on exactly how these cuts have negatively impacted people. The report highlights high unemployment and lack of access to healthcare as specific impacts of premature austerity movements.

One human rights violation opens the way for others, often resulting in [extreme] poverty. For example, without access to safe drinking water or sanitation services, people become sick. Lack of access to healthcare can cause a person to lose their job. Lack of access to a quality job means a person is reliant on personal savings (which poor people tend not to have) and welfare programs (which, remember, are being cut). A shock or crisis that may result in a minor inconvenience for someone whose human rights are fulfilled can be catastrophic for those less fortunate. In Europe, the combination of high unemployment and austerity is resulting in a “lost generation” of potential, and that’s Europe! In places with extreme poverty, weak financial institutions, and unresponsive governance, the human costs of premature austerity are naturally greater.

While I think a basic income guarantee is probably fiscally unsustainable (and in a country like the U.S., politically impossible), I do strongly believe in government job guarantee programs. Anyone who is willing to work hard to make their community / city / state / country a better place should be able to make an honest living doing so (just as anybody who is willing to defend U.S. national security can get a job in the military). Of course this would require greater levels of taxation and public spending, not less.

The combination of corporate income tax minimization (from “inversion“, off-shore tax dodging, and government subsidies / tax breaks / and other loopholes in tax codes) and companies forgoing workers for capital is unsustainable–companies are reaping record after tax profits while people suffer without having their basic rights fulfilled. As a result, tax reform and guaranteed public employment must figure more prominently in future political economy debates and policies.


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Economic Outlook: Developing or Developed, National Investment Into “Quality” Jobs Yields Strong Returns

Original article:

Developing countries that invested in quality jobs from the early 2000s grew nearly one percentage point faster every year since 2007 and were better able to weather the economic crisis than comparable economies, according to a new report by the United Nations labour agency.

The annual report of the International Labour Organization (ILO), The World of Work 2014, focuses this year on the relationship between good jobs and national development through analysis of 140 developing and emerging nations.

Decent work opportunities for women and men help trigger development and reduce poverty,” Guy Ryder, Director-General of the ILO,” said in a news release on the launch of the report, subtitled Developing with Jobs.

“Social protection, respect for core labour standards and policies that promote formal employment are also crucial for creating quality jobs that raise living standards, increase domestic consumption and drive overall growth,” he added.

“In view of the evidence, it is essential to make decent work a central goal in the post-2015 development agenda,” stressed Raymond Torres, Director of the ILO Research Department.

Quality jobs are an important tool for escaping poverty traps. In a recent post, I said that economics is always context sensitive; this does not mean, however, that certain things–such as quality jobs–are not important in all contexts. Whether in a rich or poor country, societies poorest are unable to escape poverty traps because they do not save–they either spend their entire income on survival or short-term luxuries to distract them from life’s problems. While “extreme poverty” (living on less than $1.25 /day, adjusted for purchasing power parity) is confined to the world’s least developed countries (LDCs), relative poverty exists everywhere. While the exact income level needed to escape a poverty trap (the inflection point on the graph above) is context sensitive, the general relationship holds in all contexts.

Underpinning the universality of relative poverty is the inverse relationship between marginal propensity to consume (MPC) and income; the lower ones income, the greater percentage of it they will consume. The flip side of this is low savings–the higher one’s MPC (ranging from 0-1), the lower one’s MPS (MPS + MPC = 1). This inability to save perpetuates a vicious cycle of low productivity, low wages, and low savings resulting in inadequate investment in “human capital” (education, healthcare, etc), which is what causes the low level of productivity in the first place–a poverty trap. While different income groups in different countries have different levels of MPC/S, this general relationship between income, consumption, savings, investment and poverty holds in all contexts.

The U.N. report cited at the beginning of this post focuses on quality job creation in developing countries; I would like to shift the focus to America’s political economy. No politician, particularly in a democracy, would ever say they are opposed to creating quality jobs. Therefore, we must assess the different ideological / policy approaches to quality job creation, in order to determine which approach is most likely to succeed:

Liberals:

Invest in human capital, particularly needs-based investment (which, due to low levels of income / savings, these people cannot afford themselves) to boost worker productivity, physical capital (infrastructure projects),  and growth markets (such as renewable energy) to boost economic output and create jobs in a depressed economy (counter-cyclical fiscal policy).

Raise the minimum wage and support collective bargaining (unionization) to increase take home pay for “blue collar” workers.

Conservatives:

Cut spending to reign in the deficit, restoring confidence in the economy so “job creators” (those who hold financial capital) will reinvest into the economy. Perpetuate a “race to the bottom” by discouraging collective bargaining and subsidizing private job creation by providing tax breaks / subsidies to private companies .

Reduce taxes and regulations as much as possible (starve the “beast”). Rely on private actors, market forces, and trickle-down economics to result in the optimal allocation of resources.

Conservatives will point to a low unemployment rate (currently 6.3%) to prove that additional stimulus spending is not needed. Liberals will counter with evidence of wage stagnation and “working poor” to argue that greater labor market intervention is needed. The question then becomes, what is a quality job? Is it simply having a job, or is a minimum salary (perhaps that inflection point) needed? Further clouding the issue is the apparent disconnect between productivity and wages, implying that simply training low wage workers–the typical remedy for escaping “poverty traps”–may be insufficient to create “quality jobs” (and hence the growing minimum wage movement).

History has resoundingly and repeatedly debunked the concept of “trickle down economics” yet it keeps coming up in mainstream political economy discussions–something Paul Krugman would call a “Zombie Idea”. The reason this “zombie idea” persists is relatively straightforward–vested interests with large levels of wealth perpetuate this view through the mainstream media. They state any additional costs (taxes, regulations, wage increases) will cause massive job loss despite record high corporate profits (after taxes) and stock values , and (relatedly) historically low corporate income tax rates.

I leave my readers with this question; which plan to create quality jobs sounds more likely to work to you? Take that answer to the voting booth with you during the 2014 midterm elections, because quality jobs are the key to sustainable human development, economic growth, and social cohesion.

 


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Transparency Report: Youth Unemployment and Depression

https://i1.wp.com/www.nhs.uk/Conditions/stress-anxiety-depression/PublishingImages/C%20to%20D/Depression-support-groups_364x200.jpg

According to a recently release United Nations report, depression is the number one cause of illness and disability globally among adolescents (10-19 yrs old):

We hope this report will focus high-level attention on the health needs of 10 to 19-year-olds and serve as a springboard for accelerated action on adolescent health,” said Flavia Bustreo, Assistant Director-General for Family, Women and Children’s Health at the UN World Health Organization (WHO).

An estimated 1.3 million adolescents died in 2012, largely from preventable causes, according to the UN agency’s Health for the world’s adolescents online report released today.

Depression was found to the be the greatest cause of illness and disability in this age group, with suicide raking third as the cause of death among young people.

This report reminded me of a journal article I read during my studies, “Development Economics Through the Lense of Psychology” (abstract excerpt below):

Economists conceptualize a world populated by calculating, unemotional maximizers. This view shapes our understanding of many crucial elements of development economics–from how rural villagers save, to how parents decide on whether to send their children to school.

Psychological research, however, has documented the incompleteness of this perspective. Individuals have self-control and time inconsistency problems. They can give into shortrun temptations and later regret it. They can have strong feelings about others that drive them to commit both generous and spiteful acts. They often passively accept defaults rather than make active choices. They let the institutions around them make choices for them. And they may misread new data in a ways that fit their beliefs. In short, the rational maximization model may not be a very good approximation of human behavior.

While this journal article does not explicitly cite mental illness or depression, due to my own experiences with depression my thoughts turned to the subject. There is no one cause of depression; there are elements of both “nature” (genetic predisposition) and “nurture” (experiences in life). However, “nurture” causes tend to be more direct and therefore preventable: dehumanization / pessimism related to poverty, uncertainty about the future, and unemployment:

In the shadow of the Great Recession lies a deep depression: Youths in their 20s and early 30s are hitting new lows. Compared with older workers who have lost their jobs, young people face more complex and layered hardships that could last most of their lives. They are experiencing disproportionately high unemployment, stretching indefinitely into the future, in an increasingly unequal and uncertain social landscape. And just when they are most in need of social support, the recession has led lawmakers to erode the welfare and employment programs that youths need to move themselves — and the economy they have inherited — toward recovery.

For young people in the United States and Europe, there is an emotional layer to this economic malaise. According to a recent U.K. survey of 2,161 people ages 16 to 25 by nonprofit advocacy group the Prince’s Trust, the unemployment epidemic is driving a mental-health crisis. While overall happiness levels for the surveyed youths stayed about level over the past year, reported emotional health fell significantly for the segment that is out of the workforce and not in school or job training. These young people experienced feelings of despondency and hopelessness at a higher rate than their peers. Chronically unemployed youths were more likely to have experienced panic attacks, engaged in self-harming behavior or felt suicidal. Mental-health problems struck 4 in 10 jobless young people “as a direct result of unemployment,” according to the Prince’s Trust.

One woman interviewed for the study said, “Being out of work stripped away my self-worth and made me feel like a waste of space.”

While this study considers young people in the U.S. and Europe, one can assume that young people in the developing world experience similar issues, as  youth unemployment is expectedly worse in many less developed countries.

Depression stunts personal development; how can someone invest in themselves or act as a long-term “rational maximizer” when they cannot see any hope in their future? But children are the future, and the number one illness affecting them is depression. To not pay the price to treat depression in adolescents is incredibly shortsighted–perhaps policy makers also do not act as “rational maximizers”, at least if the thing we hope to maximize is long-term social welfare.

The costs of inaction are not limited to lost economic output, human suffering and suicide, there are also security risks associated with leaving depression untreated:

Adam Lankford, a professor from the University of Alabama, concluded that many suicide terrorists weren’t ideologues at all—but were, in fact, classically suicidal. He cited Israeli scholarly research of would-be Palestinian bombers: Forty percent of them exhibited suicidal tendencies; 13 percent had already attempted suicide, unrelated to terrorism. Lankford went on to mention a 9/11 hijacker who wrote a final note to his wife and lamented how he never lived up to her expectations. Lankford described other terrorists in Palestine and Chechnya who were in poor health, recently divorced, or financially insolvent in the months prior to an attack. He also talked about the terrorist recruiters who admitted to looking for the “sad guys” for martyrdom.

While this study is far from conclusive, it would be closed-minded to refuse to consider the relationship between mental illness and terrorism. People with depression are often looking for meaning and companionship; joining a terrorist organization provides both.

And this security risk is hardly confined to the developing world; one would be hard pressed to find a mass killing anywhere in the world that is not linked to some form of mental illness. To be fair, no statistical relationship between teen depression and violent crime has been established, although this does not rule out the strong possibility that there is some relationship between mental illness and violence.

As someone who has experienced depression, this reports findings hit close to home. I am fortunate to have been born into an upper-middle class American family and receive top notch treatment–most people are not so lucky. Depression and other forms of mental illness are often seen as a “rich person’s disease”, and treatment as a luxury. This study refutes this misconception–depression can affect anyone; old or young, rich or poor. The universality of depression gives hope that it is an issue the global community can rally around and adequately address.

Increased access to mental healthcare must be part of healthcare reforms in both developed and developing nations. This is not an abstract concept, inaction has real costs that affect many people. Further compounding this problem is the existence of a stigma against people with mental illnesses (which is likely more prevalent in less developed places). When one feels ashamed of having a mental illness, the condition generally becomes worse and treatment is not sought. Part of the solution may be educating people to break this stigma.

The prevalence of depression amongst the world’s youth is alarming, but unfortunately to this social scientist / previously depressed young adult, it is not surprising. If depression can affect people who have had all their needs met, imagine how prevalent (and under-diagnosed) it must be the world’s most impoverished areas. Failure to treat mental illness not only impedes an individual’s positive liberties, it can also result in the most grievous violation of ones negative liberties possible–murder.

For some, finding employment is enough to alleviate the symptoms of depression. For others, treatment and therapy are required. Many anti-social behaviors can be tempered by a global push to address depression in adolescents, hopefully this U.N. report focuses a stronger spotlight on preventing and treating adolescent depression.


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Economic Outlook: Of Minimum Wages and Employment

The CBO released its analysis of the employment and budgetary effects of minimum wage increase yesterday. Advocates from both sides of the isle will seize on the reports findings to “prove their point” about the (de)merits of increasing the minimum wage. I found Jared Bernstein’s Economix blog on the subject pretty even-handed:

It is important to recognize that there is a very wide range of estimates from which the budget agency can choose, as shown in the chart below, which plots results of the employment effect from dozens of studies (from a recent set of slides from the White House Council of Economic Advisers).  This wide range does not imply that the budget office made a mistake, though it looks to me as if it applied a higher job-loss estimate than is the current consensus among economists who’ve closely studied the issue.

Note:

As the chart shows, the employment impact from this “meta-analysis” clumps around zero, which is why the report finds that the policy is a significant net plus from the perspective of low-wage workers: Many more workers get a raise from the policy than are displaced from their jobs.

In fact, the study points out that the range, or confidence interval, around their central estimate ranges from a “very slight decrease” to one million.  The authors guess that there’s a two-thirds chance that the true estimate is in that range.

There is no policy I can think of that generates only benefits without any costs, and policy makers always have to weigh the two sides. In the case of the minimum wage, on the benefits side of ledger, the budget office shows that 16.5 million low-wage workers would directly get a much-needed pay increase at no cost to the federal budget.

There is one paragraph of the report Bernstein does not seize on, which I believe merits greater consideration:

An increase in the minimum wage also affects the
employment of low-wage workers in the short term
through changes in the economy-wide demand for goods
and services. A higher minimum wage shifts income from
higher-wage consumers and business owners to low-wage
workers. Because those low-wage workers tend to spend a
larger fraction of their earnings, some firms see increased
demand for their goods and services, boosting the
employment of low-wage workers and higher-wage
workers alike. That effect is larger when the economy is
weaker, and it is larger in regions of the country where
the economy is weaker. (p. 7)

The positive employment effect of increasing the minimum wage (redistributing money to lower income individuals who, by definition, spend a greater share of every dollar earned; i.e. people who have a higher “marginal propensity to consume”) is “larger when the economy is weaker“.

Can there be any question that the economy is currently very weak? Specifically, aggregate demand is most depressed for the poorest, who have seen decreases in real household income over the past decade(s) (as opposed to the wealthiest 1%, who have captured 95% of income gains since 2009).

It is, therefore, quite reasonable to assume that job losses will be closer to the “very slight decrease” end of the CBO range, if indeed they are negative at all (an assumption that is directly in line with “the current consensus of economists who have studied the issue closely”).

The other findings of the report are fairly straightforward: 16.5 million workers will benefit from a $10.10 minimum wage by 2016, 900,000 will be raised out of poverty, with negligible effects on the federal budget:

“CBO concludes that the net effect on the federal
budget of raising the minimum wage would probably be
a small decrease in budget deficits for several years but a
small increase in budget deficits thereafter.” (p. 14)

Given that any budget forecast after “several years from now” borders on divination, one can even conclude that raising the minimum wage would actually result in a net gain for the federal budget. Spending on automatic stabilizers will fall (automatically) as poorer families / individuals rise above certain income thresholds. On the other hand, lower tax revenues are estimated to come from wealthier individuals, whom tend to find ways to have an effective tax rates below what their income bracket would suggest. In other words, spending cuts will occur automatically, while drops in tax revenue are considering tax revenues that may never have been realized in the first place.

As Mr. Bernstein concluded, no policy change is without trade-offs. However, it seems pretty clear that, in the current context, the benefits of increasing the minimum wage far outweigh the losses. So when you hear conservative politicians beating the “1,000,000 jobs lost drum” and/or the “increasing the deficit drum” over the next few  months, question whether that estimate is reasonable or simply an attempt to turn public support against a common sense policy reform.


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Economic Outlook: The G20, Austerity v. Stimulus, Growth and the Right to Development

Original article:

“The Group of 20 nations pledged on Saturday to put growth before austerity, seeking to revive a global economy that “remains too weak” and adjusting stimulus policies with care so that recovery is not derailed by volatile financial markets.”

“Finance ministers and central bankers signed off on a communiqué that acknowledged the benefits of expansive policies in the United States and Japan but highlighted the recession in the euro zone and a slowdown in emerging markets.”

“Officials backed an action plan to boost jobs and growth, while rebalancing global demand and debt, that will be readied for a G20 leaders summit hosted by President Vladimir Putin in September.

 “Sources at the meeting said Germany was less assertive than previously over commitments to reduce borrowing to follow on from a deal struck in Toronto in 2010, with the improving U.S. economy adding weight to Washington’s call to focus on growth.

With youth unemployment rates approaching 60 percent in euro zone strugglers Greece and Spain, the growth versus austerity debate has shifted – reflected in the fact that G20 finance and labor ministers held a joint session on Friday.”

“The G20 accounts for 90 percent of the world economy and two-thirds of its population – many living in the large emerging economies at greatest risk of a reversal of capital inflows that have been one of the side effects of the Fed stimulus.

One thing we would like to emphasize is the importance of coordination,’ said Indonesian Finance Minister Chatib Basri, cautioning that scaling back policies of quantitative easing elsewhere “immediately affects” emerging markets.”

“The International Monetary Fund warned that turbulence on global markets could deepen, while growth could be lower than expected due to stagnation in the euro zone and slowdown risks in the developing world.

‘Global economic conditions remain challenging, growth is too weak, unemployment is too high and the recovery is too fragile,’ Managing Director Christine Lagarde told reporters. ‘So more work is needed to improve this situation.'”

Yesterday I discussed the coordinating role groups such as the G20 play in today’s globalized economy. That post focused specifically on coordinating efforts to curb corporate tax-evasion. Today’s article emphasizes that fiscal and monetary policies must also be coordinated in order to achieve sustainable human development on a global scale.

Fiscal stimulus efforts must be coordinated; if they are not, the benefits of an individual countries stimulus programs will not be fully realized. Consider a hypothetical jobs program in the U.S. If this program is enacted unilaterally, then depressed demand in export markets (ex E.U.) will cause increased production capacity in the U.S. to lead not to greater trade but surplus goods and lower prices–employment gains will not be sustained by the private sector and will likely be reversed once stimulus money runs out. However, if fiscal stimulus programs were coordinated, and both the U.S. and the E.U. increased productive capacity and income, then a basis for trade and self-sustaining growth could emerge, making fiscal stimulus a short-term “shot in the arm” (as it is intended to be) instead of a permanent program (which is not sustainable for governments and often leads to uncompetitive industries).

Monetary policy must also be coordinated. Quantitative Easing by the U.S. Federal Reserve and the Bank of Japan have injected cheap money into the global economy. Seeking higher returns, this cheap money is often channeled towards emerging markets (such as the “BRICS”). One fear is that once QE policies wind down, emerging markets will experience “capital flight” as higher returns become available in more stable markets. In order to temper this inevitable effect of monetary tightening, both monetary policy coordination and “forward guidance” are needed from major central banks. Bernanke recently reasserted that the Fed will continue bond-buying until U.S. unemployment drops to 6.5% or inflation rises to 2.5%. However, this forward guidance is slightly muddled by ideological differences within the Fed, and amplified by Bernanke’s presumed exit as chairman of the Fed early in 2014. Coordinated monetary policy can provide the clarity needed to assuage markets. In a surprise move a few weeks ago, ECB head Mario Draghi “promised rates will remain ‘at present or lower levels for an extended period of time.’” Indications that the ECB and BoJ are committed to providing liquidity to global markets will make the Feds (eventual and inevitable) retreat from QE less damaging to global markets.   

This G20 meeting has ushered in much welcome news, “in contrast to an ill-tempered G20 meeting in February colored by talk of currency wars.”

About a month ago, I discussed the impacts of austerity programs on states human rights obligations. This post focused a study Spanish austerity and healthcare. The G20 is more concerned with global issues (although Spain and Greece are still a poster children for youth unemployment and the social deterioration that austerity can cause during a recession, and are therefore common examples for pro-stimulus / anti-austerity proponents).

People often consider human rights as positive or negative rights; either the government has to directly provide a good / service or prevent another party from violating human rights. Another aspect of human rights is creating an enabling environment for sustainable human development. “The right to development, which embodies the human rights principles of equality, non-discrimination, participation, transparency and accountability as well as international cooperation, can guide our responses to a series of contemporary issues and challenges. The right to development is not about charity, but enablement and empowerment. High Commissioner for Human Rights Navi Pillay has called on governments and all concerned…to move beyond political debate and focus on practical steps to implement the Declaration. ‘States have the duty to cooperate with each other in ensuring development and eliminating obstacles to development,’ according to the Declaration (full text here).”

One essential element of the right to development is the international recognized “right to work”. Article 23 of the Universal Declaration of Human Rights states, “Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.” This right is a particularly important aspect of the right to development, as work income provides a means of self-determination and the ability reduce dependence on welfare programs as people attempt to realize their personal goals and aspirations.

Sometimes people do not work because they are lazy, or suffer from physical or mental conditions which impede their ability to find or maintain work. However, when unemployment rates are above 20%, and youth unemployment is above 50%, this can hardly be attributed to laziness (unless you think the world’s lazy people are all collaborating and putting themselves through years of misery in order to remain lazy, but that argument is absurd hard to sell). Such high unemployment levels are due in large part to government inaction / inability to pass stimulus programs, and the negative effects of austerity programs in the face of inadequate private sector demand / personal consumption (this is not stipulation or a normative stance, but rather what textbook economics tells us).

Such high levels of unemployment represent a failure of states to uphold the universal human “right to work”, which undermines the internationally recognized “right to development”.  For years now, economic policy has been dominated by politics and vested interests. It is heartening to see national labor and finance ministers finally coming together to “eliminate obstacles to development”. More concrete programs will probably hopefully be hammered out when heads of state come together in Moscow in September for the G20 leaders summit.

I hope this is not “too little too late”, and that the years since the Great Recession took hold have not lead to “lost generations” of young people who are doomed to a lifetime of anti-social, unproductive, and sometimes criminal behavior (as some people have argued). While there will inevitably be some lifetime dependents resulting from the Great Recession (as there always are from traumatic experiences, be they economic downturns, natural disasters or violent conflicts), I am optimistic that as a whole young adults and the unemployed in general are eager to get back to work once the global policy coherence needed to create those jobs is established. G20 meetings this past week represent a meaningful step in that direction.


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Economic Outlook: The (Unsuprisingly) Dismal Jobs Report

The jobs report for March came out today, and it was not pretty:

“American employers increased their payrolls by 88,000 last month, compared with 268,000 in February, according to a Labor Department report released Friday. It was the slowest pace of growth since last June, and less than half of what economists had expected.”

“The unemployment rate, which comes from a different survey, ticked down to 7.6 percent in March, from 7.7 percent, but for an unwelcome reason: more people dropped out of the labor force, rather than more got jobs.

The labor force participation rate has not been this low — 63.3 percent — since 1979, a time when women were less likely to be working. Baby boomer retirements may account for part of the slide, but discouragement about job prospects in a mediocre economy still seems to be playing a large role, economists say.”

There are a number of reasons for this dismal jobs report. The most obvious explanation would be the sequester, but this is incorrect. The sequester has not had enough time to work its way through the economy enough to significantly affect unemployment–most economists agree unemployment will spike at the end of the year due to the sequester. The payroll tax holiday expiration is a more plausible cause; part of the “fiscal cliff” deal, the tax increase disproportionately hit low income American’s disposable income starting in January. Both policies compromise aggregate demand (the payroll tax through consumption, sequester through government spending), reducing any incentive businesses might  otherwise have to increase hiring.

 Is it surprising we have had stagnant growth and stubbornly high unemployment given the current conditions? Any economist who understands basic macroeconomics could have predicted the growth-recession that has come to define post-Great Recession America, given the current global economic environment and political gridlock here at home. Paul Krugman, who always seems to focus on the most pertinent indicators and explain complex economic issues in an accessible way, does it again:

“But is this really a surprise? I mean, it’s true that the incipient housing recovery has made many people somewhat optimistic — I’ve been one of them — but when all is said and done, we are following strongly contractionary fiscal policy in an economy in which monetary policy is still ineffective because of the zero lower bound. How contractionary? Look at CBO’s estimates of the cyclically adjusted budget deficit (third column):”

” That deficit has declined from 5.6 percent of potential GDP in 2011 to 2.5 percent in 2013 — that’s 3 percent of GDP, which is a lot of austerity. Not all of that cut has even hit yet — the sequester isn’t in the macro numbers yet — but the rise in the payroll tax is very clearly driving the latest bad numbers, which show big declines in retail.

This is really stupid; as long as we’re at the zero lower bound, austerity is a huge mistake.”

Driving most of this deficit is lower budget revenues, a legacy of the G.O.P.’s failed “starve the beast” theory of governance.

But enough finger pointing. The real issue here is how much austerity has been pushed through (3% of GDP) at a time when the private sector cannot make up the slack of reduced government spending (what the zero lower bound essentially means, that even at a 0% interest rate, the private sector still cannot provide enough capital for the economy to run at full capacity).

How far from full capacity are we? According to the CBO, America has produced under capacity by a large margin since  2009 (-6.8% in ’10, -6.2% in ’11, -5.7% in ’12 and an estimated -5.9% this year). If we multiply those numbers by the GDP of those years, we get this much lost output: $896.24 billion in ’10, $883.28 billion,$ 779.19 billion in  2012. That’s a whopping 2.558 trillion dollars over the last 3 years. If the U.S. government had captured 20% of that in tax revenue, that would’ve been an additional $511 billion in revenue over those 3 years (actually, these numbers are an underestimation, as the GDP gap is based off potential GDP I used real GDP).

Also alarming is that the 2013 projected output gap is supposed to go up, from 5.7% in 2012 to 5.9% in 2013. Not only is our economy recovering, austerity measures are actually pushing the economy in the wrong direction.

There is a large cost to both the government and the people with so much idle production capacity. The government has to pay more benefits and receives less tax revenue, exacerbating the federal deficit. People are sitting idle, their skills are deteriorating, not to mention the psychological effects of long term unemployment.

Once you correct for these automatic stabilizers, the U.S. is basically on a stable fiscal path. Automatic stabilizers are cyclical, they do not have to be addressed by policy as they adjust automatically based on the economy. Low revenue from inadequate taxation is structural, and requires tax reform. Spending on social programs and government employment did not get us into our current problem, and cutting these programs will not get us out of it–it will actually dig us into a deeper hole.

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