Bernanke on the US labor market

We have seen some positive signs on the jobs front recently, including a pickup in monthly payroll gains and a notable decline in the unemployment rate. That is good news. At the same time, some key questions are unresolved. For example, the better jobs numbers seem somewhat out of sync with the overall pace of economic expansion. What explains this apparent discrepancy and what implications does it have for the future course of the labor market and the economy?
...
A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed. Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force. Moreover, we cannot yet be sure that the recent pace of improvement in the labor market will be sustained. Notably, an examination of recent deviations from Okun's law suggests that the recent decline in the unemployment rate may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009. To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.

I also discussed long-term unemployment today, arguing that cyclical rather than structural factors are likely the primary source of its substantial increase during the recession. If this assessment is correct, then accommodative policies to support the economic recovery will help address this problem as well. We must watch long-term unemployment especially carefully, however. Even if the primary cause of high long-term unemployment is insufficient aggregate demand, if progress in reducing unemployment is too slow, the long-term unemployed will see their skills and labor force attachment atrophy further, possibly converting a cyclical problem into a structural one.

If this hypothesis is wrong and structural factors are in fact explaining much of the increase in long-term unemployment, then the scope for countercyclical policies to address this problem will be more limited. Even if that proves to be the case, however, we should not conclude that nothing can be done. If structural factors are the predominant explanation for the increase in long-term unemployment, it will become even more important to take the steps needed to ensure that workers are able to obtain the skills needed to meet the demands of our rapidly changing economy.

Quelle: Federal Reserve Bank

DeLong and Summers on Austerity

The paper by Brad DeLong and Larry Summers that I advertised a couple of days ago, is available now.

Paul Krugman writes about the main arguments of the paper:

The headline point is the argument that austerity when you’re in the liquidity trap may well worsen, not improve, your long-run fiscal position; I’ve been making the same point for a couple of years, but Brad/Larry present some evidence from the birth of Eurosclerosis and the downgrading of US potential output estimates since the crisis began.

They also emphasize the crucial point that even if austerity doesn’t literally worsen the long-run position, it does at best very little to improve that position — yet imposes large current costs. So the cost-benefit analysis is overwhelmingly in favor of stimulus as long as you’re in the liquidity trap.

And what that says, in turn, is that the embrace of austerity by policy and political elites in late 2009 and early 2010 was an almost inconceivably terrible blunder. The result of that embrace was the imposition of huge economic and human costs, with little if any benefit.

DeLong/Summers will be controversial, as it is at the center of the debate about the consequences of fiscal policy in the most recent economic crisis, which is an important topic when it comes to the campaigns of Democrats and Republicans for the United States presidential election.

Krugman on Europe's economy

Europe's economic situation isn't too rosy:

European industrial production post 1929, from League of Nations, versus European industrial production post 2007, from Eurostat. Better this time, but not as much as you might think — and stalling:

Fiscal Policy in a liquidity trap: New paper by DeLong and Summers coming up

Brad DeLong and Larry Summers are in the process of writing a paper about the effects of fiscal policy in a depressed economy. The paper will emphasize the special features of fiscal policy in a liquidity trap.

DeLong and Summers "argue at greater length, [that] [...] there is very little direct connection between spending over the next couple of years and long-run fiscal prospects. Between low borrowing costs and high multipliers, spending now would do little to worsen the debt picture a decade from now; indeed, as DeLong-Summers argue (and some of us have been arguing, less formally, for a while now), there’s a plausible case that spending more now actually improves the long-run fiscal picture — and that austerity worsens it."

This paper can be expected to trigger a lot of discussion and controversy in the academic and political world; especially in the US, but probably in Europe as well.

The rise and fall of Keynesianism during the Great Recession

A new paper by Henry Farrell and John Quiggin is currently under journal review, but Farrel has already posted a link on his blog:

Farrell, Henry; Quiggin, John: Consensus, Dissensus and Economic Ideas: The Rise and Fall
of Keynesianism During the Economic Crisis

The employment situation in the US

Four articles for your reading pleasure:

• Calculated Risk
• Tim Duy
• Mark Thoma
• Paul Krugman

What's wrong with economics in the crisis?

Paul Krugman explains in detail:

To say the obvious: we’re now in the fourth year of a truly nightmarish economic crisis. I like to think that I was more prepared than most for the possibility that such a thing might happen; developments in Asia in the late 1990s badly shook my faith in the widely accepted proposition that events like those of the 1930s could never happen again. But even pessimists like me, even those who realized that the age of bank runs and liquidity traps was not yet over, failed to realize how bad a crisis was waiting to happen – and how grossly inadequate the policy response would be when it did happen.

Read more

Zu Tode sparen?

Die österreichische Tageszeitung "Die Presse" warf diese Woche in einem Artikel die Frage auf, ob sich Europa zu Tode spare: "Haben wir mit der Entscheidung, die öffentlichen Haushalte zu kürzen, die Rezession vielleicht vertieft?" Es erstaunt mich ehrlich gesagt doch einigermaßen, dass vielen Wirtschaftsexperten und Wirtschaftsjournalisten erst jetzt zu dämmern beginnt, warum eine auf Ausgabenkürzungen basierende Fiskalpolitik als kontraktiv bezeichnet wird.

Das Gros der politischen Verantwortungsträger streut sich Sand in die Augen, seit die Staatsschuldenkrise europäischer Länder in den medialen und politischen Fokus rückte: Die radikale Sanierung von Staatshaushalten durch sofortige und kompromisslose Ausgabenkürzungen werde das Vertrauen in die Zukunftsfähigkeit der jeweils betroffenen Volkswirtschaften stärken, heißt es allerorten; Konsum und Investitionen würden wieder zu blühen beginnen, sobald der Dämon der Schuldenmacherei ausgetrieben sei; sodann werde Europa, das gebeutelte, strauchelnde wirtschaftliche Europa, in neuem Glanz erstrahlen.

Der Glaube daran, dass kontraktive Fiskalpolitik nicht nur lang-, sondern sogar kurz- und mittelfristig auf mysteriöse Weise Wirtschaftswachstum bringen kann, ist eine gigantische Illusion, die nicht dazu angetan ist, Europa den Weg in eine bessere Zukunft zu weisen.