University of Chicago economist Casey Mulligan believes that the US unemployment rate has remained high because of many separate public policy changes. Big and small, each one influenced workers, businesses and consumers by creating new incentives.
For workers, Dr, Mulligan described a bigger safety net:
People could collect unemployment insurance (UI) for 99 weeks instead of 26.
Food stamp programs became more inclusive with less stringent qualifications.
The food stamp benefit grew by 40% in 2 separate stages.
A $25 “bonus” was added to the usual unemployment benefit.
The duration of work history was decreased as a qualification for UI.
Mortgage help increased for longer unemployment.
The unemployed could receive 65% of their health insurance expense.
He also explained why, for businesses, the incentive to fire workers increased:
Concerned employers knew that fired workers would get relatively high benefits.
Obamacare taxes and tax hikes are making employees more expensive.
It became increasingly attractive to replace workers with less expensive capital.
Employees had to be fired (rather than quitting) to qualify for unemployment benefits.
In addition, certain consumers had less to spend.
Increased taxation involves taking more money from one group than it gives to the other group.
As a result, several million lower income workers had more when unemployed than with a job while the majority had the equivalent of 85% to 90% of their previous income. Yes, of course, depending on the individual, the new incentives have a varied impact. Still though, Dr. Mulligan asks all of us first to recognize that our lawmakers have implemented changes that he believes have increased the unemployment rate substantially.
Then we have to decide whether we support the tradeoff: More support for the unemployed or more efficiencies that lead to fewer unemployed?
7.9% during January, the civilian unemployment rate touched 10% during October, 2009.
Sources and Resources: An hour long, every minute of the econtalk podcast in which Casey Mulligan described his research and new book to Russ Roberts was captivating. It perfectly conveyed the tradeoff that we all need to know, whatever our preferences. Then, for recession data, here is the BLS website.
Secretary of the Treasury Geithner just sent Senate Majority Leader Harry Reid a letter.
Noting that in 5 days the US will again have hit the debt ceiling, Secretary Geithner explains that actually, we might have an extra 2 months. In an appendix to his letter, he outlines 4 types of “extraordinary measures” that will let us avoid a debt default for awhile. He adds though, that he is not sure how long he can stretch it because of the uncertainty created by the current negotiations over tax increases and spending cuts. (Ironically, no Congressional tax and spending deal means more time to get a new ceiling.)
Where is the debt ceiling? $16.394 trillion.
Where were we on December 26th? $16.027 trillion.
In 1917, Congress decided it could not keep track of every U.S. loan. So, to maintain some control over national finance, they said, “We will decide the maximum amount the U.S. can borrow.” And, from that day onward, whenever necessary, they voted to increase how much the U.S. could borrow. Since 1962, the U.S. Congress has raised its debt ceiling 76 times.
Sources and Resources: Here is Secretary Geithner’s letter and the Treasury Department daily update of US debt totals. For some debt history, John Steele Gordon’s Hamilton’s Blessing The Extraordinary Life and Times of the National Debt is wonderful. Also, this CNNarticle and these these econlife posts, Debt Ceiling 101 and Looking at the Debt Ceiling, provide some background and some of the above history.
People love to cite the lipstick effect. Named in 2001 by former Estée Lauder CEO Leonard Lauder, the lipstick effect just says that during hard times women enjoy more inexpensive luxuries like lipstick.
But looking at this graph from The Economist, you can see that the lipstick effect does not consistently correlate to good and bad times.
Still though, Mr. Lauder says the effect is really about less expensive luxuries that buoy people during hard times. For recession year 2008, with sales skyrocketing, perhaps nail polish is the new lipstick.
In addition to lipstick and nail polish, for the following 2008 recession indicators, I have don’t have sufficient data, but don’t they make sense?
diaper rash cream sales up
disposable diaper sales down
divorce rates down
more adult children moving in with parents
rising food truck sales
architects billing less
men’s underwear sales down (MUI)
Our Bottom Line: Like a rubber band, our spending can be somewhat elastic. During prosperity, for certain goods and services, our spending stretches a lot. Then though, for those same items, when recession hits, we buy much less. Called the income elasticity of demand, when we have noticeable changes in the quantity that we demand because our income drops, our buying behavior creates a recession indicator.
Sources and Resources: For lipstick effect and source of graph, here; diaper rash data, here; architecture, here; boomerang generation, here; less divorce, here; food truck sales, here; men’s underwear index, here.
There might be 2 ways to look at the fiscal cliff.
Specifically, we can focus on tax increases and spending cuts:
Bush era tax cuts: expire
2010-2011 2% payroll tax cut: expire
Affordable Care Act taxes: kick in
Emergency unemployment benefits: expire
Budget sequester (cuts) from Super Committee failure: kick in
Previously legislated budget cuts: kick in
Defense cuts from Iran/Afghanistan reductions: kick in
Medicare payment rates for physicians: reduced
More broadly, we can take a step backward and look at the bigger problems that really have to be solved:
63% of the 2011 federal budget was on “autopilot.” Debating cuts, the Congress only looked at 37% of spending.
1 of 4 budget dollars is spent on healthcare. Looking back 50 years ago, less than 10% of all spending was healthcare, and looking forward, we are heading toward 33%.
Slicing federal employees and agencies would save money but not nearly enough. Even if we fired the entire federal payroll, the deficit would dip by less than one third.
Defense spending is massive. We spent 1 out of every 5 dollars on defense in 2011.
We now borrow close to 36 cents for every dollar we spend. And yet still, the more affluent are paying a larger proportion in taxes and the middle of the middle class (as expressed in the video) is paying a lower proportion.
Where does this leave us? Defined as taxing, spending and borrowing, US fiscal policy is the real fiscal cliff.
Sources and Resources: The specifics of the fiscal cliff are from a past econlife post while the summary of the big issues is from the David Wessel/WSJ video that follows. For even more detail, this Tax Foundation description of the fiscal cliff is good.
Illustrated by this graph from the Minneapolis Federal Reserve, sometimes one orange line can create a huge debate.
The thick orange line representing the US recovery from the December 2007-June 2009 recession reflects a tepid ascent next to curves that represent other post-WW II economic recoveries. Still though, Democrats say the numbers reflect progress while Republicans call them poor. How can we decide?
Looking at several academic papers, it gets ever more confusing. Some policy makers and scholars believe that the recovery is typical. Explaining that it takes a long time to bounce back from a recession connected to a financial crisis, they say the trajectory of this recovery is what we should expect. Disagreeing, other equally auspicious individuals use their data to prove that financially related deep recessions actually precede robust economic growth.
The disagreement takes us to the data. Should the US be compared to other culturally and institutionally different countries or should the data just focus on US economic history? Is is more valid to look at how how long it takes to return to pre-crisis output levels or how fast the economy grows during its recovery? Do we look at per capita or overall figures?
If you would select the first half of each question in the previous paragraph, then the recently announced 2% growth rate for the 3rd quarter of 2012 is progress. If, on the other hand, your preference is the second choice, you can say that current numbers should be better. And as you can see, Obama likes the former and Romney the latter.
A Final Fact: Just 2 definitions today.
A recession: Technically, a recession is a decline in real GDP for 2 successive quarters. The people who decide the dates of recessions, the NBER (National Bureau of Economic Research), say that they take into consideration additional variables including real income, employment and industrial production.
GDP: Most simply stated, the Gross Domestic Product is the total dollar value of the goods and services produced in a country during a specific time period.
Sources and Resources: Replete with data and ideas about financial crises, recessions, and recoveries, Kenneth Rogoff’s and Carmen Reinhart’s 2009 book and their paper, “This Time Is Different,” say that recoveries from systemic financial crises take a long time. Much more briefly, in his blog, John Taylor disagrees with the Rogoff/Reinhart approach as do Michael Bordo and Joseph Haubrich in this Cleveland Federal Reserve paper. Also, you might enjoy manipulating the interactive graphs from the Minneapolis Fed. Finally, here and here is the actually debate unfolding with Carmen Reinhart and Kenneth Rogoff on one side and John Taylor and Michael Bordo on the other.