Where's The Recovery?

There has been an abundance of column inches devoted to the weak job recovery following the Great Recession.  Analysts from the left and right have offered opinions about why employment didn’t spring back after the official end of the downturn in July of 2009.   

But what many have missed is that this phenomenon isn’t new.  In the three most recent economic downturns the US job market has been noticeably less fluid than in earlier times.  Unemployment – after the recessions of 1990, 2001, and 2007 – was slow to rebound, and in all three cases continued to increase even after the end of the economic contraction. 

This is in stark contrast to our earlier postwar recessions as illustrated clearly in the graph at the top.  In those instances joblessness fell as soon as the economy began to grow. 

A dissection of higher prices...

Inflation is back in the news. Outspoken president of the Minneapolis Federal Reserve, Narayana Kocherlakota, said yesterday that the current monetary policy - attempting to free the stuck labor market - could cause “dangerous” inflation. 

But I wonder if higher prices are really such a bad thing right now. 

The obvious downside is their affect on consumer spending. But, considering the uncharacteristically low levels of core inflation since the recession began, the benefits might outweigh any sticker shock that arises with a modest price increase over the short-run.

Inflation, when it is consistent and predictable, can act like a reset button on the economy. It doesn’t change the potential for production in a country but it does alter the impact of past events on decisions today. The benefits can include less debt pressure on homeowners, more investment by businesses and, finally, a more efficient distribution of wages.

Debt burden: One widely recognized problem with our economy now is deleveraging. Workers are applying more of their income to mortgages and other debt and, consequently, are spending less on trips to the mall. For many, who invested at the height of the housing bubble, the immensity of these liabilities can be nearly insurmountable. Those in the most trouble, who don't qualify for a refinance, can only watch helplessly as their house payments barely make a dent in the principal.

But in an economy with a higher inflation rate the real value of these loan burdens would be reduced. As wages adjusted upward to the new price of money less of a workers’ income would be devoted to debt. 

Investment: Businesses are holding record levels of cash today, which effectively takes it out of the hands of workers and consumers. They’ve made this decision because the current investment opportunities don’t provide a high enough return for the risk. If the value of that cash reduced over time, however, those businesses would have to reevaluate these positions. A bit of inflation would give then the necessary jolt to change that cash into something tangible like a new employee. 

Opponents argue, instead of investing this idle cash in job creating activities, businesses would buy commodities and, as a result, create a new bubble. This is a compelling argument but I think these opponents see our economic situation in too dire of terms – they don’t perceive any good business investments today. 

On the contrary, I think companies are near the point of investment, but remain in a holding pattern because of low demand and uncertainty caused by events like the Euro crisis. A rise in prices would be the spark needed to kick them out of this fruitless circle of stagnancy.  

Job Market: Wages are stickier than consumer prices and don't move so freely up and down. So inflation would initially lower real levels of income as prices moved upward.  Worker contracts would eventually follow, however, and this adjustment period would allow employers to reassess their previous wage decisions. 

As the economy continues to shift, certain sectors have asserted themselves - such as high tech. But because of past labor contracts and established wage norms these new efficient areas may not be able to attract the best workers. With a reset of wages caused by higher inflation, however, income for the most productive people in the most productive and competitive sectors would increase the most. This would allow the job market to more accurately indicate which sectors are efficient and growing, and guide new workers to those new jobs.
 

For those wanting to read more, Planet Money recently examined the economy-wide benefits and drawbacks of a 5% inflation rate.


 

Journalism when it's done well: A case study

For my writing class I examined this article written over 14 years ago by an investigative journalist at the Seattle Times.  It was an award winning piece that led to sweeping legislation and eventually a book.  It is the type of story that all journalism students hope to complete sometime during their careers.

  

The Writer: Duff Wilson is an investigative journalist who currently covers the pharmaceutical and tobacco industries for the New York Times.  Prior to arriving on the East Coast in 2004, he was the investigative projects reporter at the Seattle Times where he was a three-time finalist for the Pulitzer Prize. 

The Story:  " Fear in the Fields – How Hazardous Wastes Become Fertilizer” is a two-part investigative report published in the Seattle Times on July 3rd and 4th, 1997.  The piece described how certain companies avoid the high costs of hazardous waste disposal by legally ‘recycling’ these toxic substances into fertilizer.

Part One of the story follows Patty Martin, mayor of the small town of Quincy Washington, in her effort to alert the public that farmers in her area were unknowingly using fertilizer made from hazardous waste.  She was prompted to investigate fertilizers after the local branch of the agricultural supply company, Cenex, disposed of hazardous material on a nearby farm and claimed it would benefit the crops. 

A Mashup of Deficits

The US congressional committee responsible for striking a deficit reduction deal ended its work without an agreement on Monday.  In the debt-ceiling negotiations, politicians (were) debating how to reduce the federal deficit by $2 trillion to $4 trillion over the next 10 years. 

But, you may ask yourself: How did we get here?  

Some say it’s thanks in large part to the stimulus. Others counter, contrary to popular assumption, stimulus spending under the American Recovery and Reinvestment Act has been a very small factor in the expansion.

Possible Sign of Life?

There was no obvious indication of an overall impending recovery in last month’s jobs numbers. At 9 percent, October’s unemployment didn’t change much from previous months. 

But one outlier existed amongst this clutter of figures.  Job prospects for workers without a high school diploma apparently increased as their year-to-year unemployment rate dropped by 1.5 percent.  That’s over seven times the drop witnessed by workers with some college experience. 

Of course, at 13.8 percent, the highest jobless rate of all workers, this demographic has the most room for improvement. 

As I outlined in an earlier post these numbers should be viewed with a degree of skepticism.  Month-to-month and even year-to-year estimates are subject to change as more information is examined. 

But let’s assume this decrease is accurate and will continue over the next few months.  What would that tell us about the job market? 

It’s safe to assume that workers without a high school diploma are low-wage earners.  If they are finding a more receptive job market, then perhaps the freeze on investment by businesses is beginning to thaw. 

It isn’t surprising that preceding a recovery, low-income workers would be the first hired, largely because they were the first fired at the beginning of the downturn.  But, also, a company with only tepid confidence would likely want to initially test the waters with the cheapest labor available. 

I will keep an eye on this stat when November’s numbers are released and, perhaps, if unemployment continues to drop amongst this group it will indicate a trend that foments a larger labor market recovery. 

Profit Sharing and Unemployment

More employers should link worker pay to the success of their company.  A profit-sharing arrangement or a system of bonuses pegged to fluctuations in revenue would increase worker engagement and, consequently, productivity.  But equally important, if adopted on a large enough scale, it would reduce unemployment during bad times.  

When a recession hits, demand for goods typically drops and, as a result, prices fall.  But wages are stickier and don’t usually move in a downward direction.  Instead, when low prices cause a company's earnings to go down, employers cut their workforces leading to long lines at the unemployment office. 

But what if employee pay was largely based on revenues?

During a downturn, a company’s cost of employment would decrease with the drop in revenue eliminating much of the need for layoffs.  For the workers, pay cuts aren’t pleasant, but knowing your job is safe is a tradeoff I think many would take. 

Additionally, this gives employees a stake in the company's recovery and provides an incentive for everyone to help right the ship.

New Numbers Hot Off The Presses.....

It was the second of September and the Bureau of Labor Statistics (BLS) released a particularly distressing jobs statement for the month of August. 

Zero growth in employment was the figure that jumped off the page – a number equally gloomy and unexpected.  Publications quickly made room in their headlines for this breaking news and commentators began tossing blame around to their preferred scapegoats. 

The only problem?

This number was revised up in the next month’s BLS report. And when I looked at the October info released last week, I found this sentence at the bottom of the page.

The change in total nonfarm payroll employment for August was revised 

from +57,000 to +104,000.

So initially there were zero new jobs, then 57,000, and finally 104,000. 

Jobs and Electricity

Upgrading the system of power lines crisscrossing the US seemingly satisfies two prominent goals of President Obama’s jobs agenda – growing the renewable energy sector, and rebuilding public infrastructure. 

But as far as I’ve seen, no large-scale plans to do this are in the works. 

Last week I attended a lecture by an analyst from Bloomberg New Energy Finance who argued that wind and solar power from the middle of the country have the potential to satisfy much of our country’s energy needs. 

The problem? 

An antiquated electrical transmission system keeps this energy stuck in those relatively sparsely populated areas.