US President engaging in economic vandalism

Last week (April 5, 2013), the – US Bureau of Labor Statistics – released their latest – Employment Situation – March 2013 – which showed that in seasonally adjusted terms, total employment decreased by 206,000 in March and the labour force shrunk by a further 496,00 persons. The twin evils – falling jobs growth and declining activity. While the unemployment rate fell to 7.6 per cent (from 7.7 per cent) that is an illusory improvement. The fact is that the participation rate fell by 2 percentage points and thus hidden unemployment rose. The 290 thousand fall in official unemployment arose because the drop in employment was more than offset by the fall in the labour force. There is nothing virtuous about any of that. The facts are that it is getting harder again for Americans to get work and easier for them to lose it. The data is signalling a fairly poor outlook and hardly the time for the President to be submitting austerity budgets. But in the same week that the data came out, the President did just that. The latest budget submissions from the Administration, designed to placate the mad Republicans, is an act of economic vandalism.

The seasonally adjusted data for March 2013 showed that total employment fell by 206 thousand in the month from 143492 thousand to 143286 thousand, a decline of 0.14 per cent.

Employment growth has to absorb the growth of the labour force to ensure unemployment doesn’t rise. The task that economies typically face in a recovery from a deep recession is that the labour force growth, itself accelerates (due to the hidden or discouraged workers re-entering the labour force) and there is a huge residual pool of unemployed as to be absorbed.

Usually, employment growth is insufficient in the early stages of the recovery to absorb the unemployment quickly and so we observe the distinct cyclical asymmetry in the behaviour of unemployment over the economic cycle. It quickly rises but only falls slowly again.

In the case of the US labour market, the labour force pressure that typically slows the reduction in unemployment is not visible. In fact, as we will see below, the labour force participation rate continues to decline, which takes pressure of the employment growth. But, of-course, that is not a good sign.

While employment growth fell by 0.14 per cent, the labour force declined by 0.32 per cent, which means that unemployment fell by 290 thousand even though employment also declined.

The following graph shows the monthly employment growth since the low-point unemployment rate month (December 2006). The red line is the average labour force growth over the period December 2001 to December 2006 (0.097 per cent per month). Unemployment rises if the employment growth is below the labour force growth rate.

What is apparent is that a strong positive and reinforcing trend in employment growth has not yet been established in the US labour market since the recovery began back in 2009. The labour market is limping along.

As a matter of history, the following graph shows employment indexes for the US (from US Bureau of Labor Statistics data) for the five NBER recessions since the mid-1970s.

They are indexed at the NBER peak (which doesn’t have to coincide with the employment peak). We trace them out to 64 months or so, except for the first-part of the 1980 downturn which lasted a short period.

It was followed by a second major downturn 12 months later in July 1982 which then endured. The current downturn has lasted 64 months and employment is still below the starting point of 100 (currently the index stands at 98).

What really is striking about the last few years in the US is the falling participation rate. The following graph shows the labour force participation rate (the proportion of those above 16 years of age that are in the labour force – that is, employed or officially unemployed) since January 2001.

Clearly, there has been a trend decline in the labour force underpinning the sharp cyclical acceleration from late 2007.

Examining participation rates provides us with information about what is happening on the margin of civilian working age population and the labour force. If, for example, the participation rises, unemployment can rise even though employment growth is strong. That is a virtuous sign because it means that the economic situation is improving and discouraged workers are coming back into the labour force as the jobs market looks more hopeful.

We juxtapose that situation with one where the participation rate is falling – which suggests discouraged workers are giving up on job search because of the dearth of vacancies available and even though unemployment might actually fall, the signs are bleak. All that sort of economy is doing is trading official unemployment for hidden unemployment. The weakness just leaves the labour force.

The fall in participation since December 2006 has been stark – from 66.4 per cent to 63.3 per cent in March 2013. What does that mean in numbers?

You can compute how much larger the labour force would be if the participation rate now was at its recent (December 2006) peak by working out the current working age population and multiplying it by the peak labour participation rate.

The difference between the actual labour force now and the “potential” labour force represents the number of workers that have given up looking for work as a result of the lack of job opportunities available, upon the assumption that there have been no sharp rise in retirements.

This difference is approximately what we might call the rise in hidden unemployment and in the case of the US is equal to 7649 thousand workers.

If we added them back into the labour force and considered them to be unemployed (which is not an unreasonable assumption given that the difference between the two categories – unemployment and hidden unemployment is due to whether the person had actively searched for work in the previous month) – then the unemployment rate would rise to 11.9 per cent rather than the current official unemployment rate of 7.6 per cent.

So there is a huge degree of slack not counted among the official unemployed in the US and tells us that the unemployment rate is likely to be a very misleading indicator of how the US economy is faring.

In other words, a lot of the continuing slack is being hidden in the not in the labour force category. If employment growth speeds up then we can expect to see unemployment rise as the participation rate rises due to improving opportunities for employment. That is not happening yet as the participation rate is continuing to fall.

The UK Guardian article (April 5, 2013) – When will this do-nothing Congress wake up to America’s jobs crisis? – is one of the few that have started to pick up on the participation rate story. It has been obvious for some time that there was almost as much slack hidden outside the official unemployment numbers as there is staring us in the face in the form of unemployment.

The Guardian article said:

Nero fiddled while Rome burned; Washington politicians have apparently taken him as their inspiration.

There are fewer Americans working than at any time since 1979. This finally adds urgency – political urgency – to a jobs crisis that is only getting deeper and more painful for Americans. The numbers of jobs added and the unemployment rate don’t show the real picture of America’s employment situation. The unemployment rate keeps dropping – it’s currently at 7.6% – which gives the illusion of a better economy.

The real story is told by another number. Economists call it the “labor force participation rate”. It tells us how many people are working, and how many are dropping out of the workforce because they can’t find a single employer who could use their abilities, even for a few hours a day. The labor force participation rate is really a measure of potential that is lost: the intelligence and strength of Americans that goes idle because it cannot find a single profitable outlet.

The reference to Nero is apposite, given that Bloomberg News reported over the weekend (April 6, 2012) that – Obama Drops Stimulus for Benefit Cut to Woo Republicans.

I had only just been examining the latest US Labour Force data and concluding that things are fairly poorly over there when I read this. It almost beggars belief. The Bloomberg article said:

Less than a week after job-creation figures fell short of expectations and underscored the U.S. economy’s fragility, President Barack Obama will send Congress a budget that doesn’t include the stimulus his allies say is needed and instead embraces cuts in an appeal to Republicans.

There will be a dodge (cut) in the way social security pension are to be indexed (I will examine that in another blog) and other cuts – of the order of $1.8 trillion over the next 10 years proposed.

The Bloomberg article concludes that:

… the federal government’s fiscal policy will continue to withdraw support from the economy next year, as it has this year, possibly further sapping growth.

In his weekly audio address on April 5, 2012 – The President’s Plan to Create Jobs and Cut the Deficit – President Obama claimed that:

Our top priority as a nation, and my top priority as President, must be doing everything we can to reignite the engine of America’s growth: a rising, thriving middle class. That’s our North Star. That must drive every decision we make.

Which is a lie given the that he has sent a budget that will constrain employment growth and appears to be drafted to placate the mad Republicans.

Despite mellifluous rhetoric about “balance” and and inclusion, the President basically rehearsed the worst neo-liberal mantra there is – the fiscal contraction expansion myth:

For years, an argument in Washington has raged between reducing our deficits at all costs, and making the investments we need to grow the economy. My budget puts that argument to rest. Because we don’t have to choose between these goals – we can do both. After all, as we saw in the 1990s, nothing reduces deficits faster than a growing economy.

My budget will reduce our deficits not with aimless, reckless spending cuts that hurt students and seniors and middle-class families – but through the balanced approach that the American people prefer, and the investments that a growing economy demands.

Except that the growing economy reduces the deficit after the deficit has supported the growth in private spending to such a point that the automatic stabilisers start turning to increase tax revenue and reduce welfare spending.

That doesn’t happen if you attack the deficit first with discretionary cuts, which erode private sector spending confidence at a time when employment growth is so weak and there are so many productive workers either unemployed or hidden unemployed.

How do you respond to that lunacy? Neither senior official demonstrates that they grasp basic macroeconomics:

1. Spending equals income. If private spending is lagging then public spending has to fill the gap. Otherwise output and employment growth will be sluggish if not negative.

2. To eat into the large idle labour pool, employment growth has to be faster than labour force growth, which means that real GDP growth has to be faster than the sum of labour force and labour productivity growth.

These facts a very simple and indisputable. Cutting public spending “at this time” is the last thing the US government should be doing.

Especially when you consider the latest labour market data from the BLS.

I last calculated what economists call Transition Probabilities from the Gross Flows data for the US labour market in September 2012. To fully understand the way gross flows are assembled and the transition probabilities calculated you might like to read these blogs – What can the gross flows tell us? and More calls for job creation – but then. For earlier US analysis see this blog – Jobs are needed in the US but that would require leadership

So I started to update my US gross flows database today, which proved to be a frustrating process because the US Bureau of Labor Statistics, normally my favourite data site, has changed the way they disseminate this data. Normally offering a lot of flexibility, they are now increasingly forcing one to use java applets, which are buggy across certain computer system and so time is wasted trying to download data.

As an example, I used to be able to get a large text-file dump for the entire gross flows data. But now there is a – Data Retrieval App – to deal with – so many boxes to tick etc. Then you get a further screen with links to 51 Excel spread sheets for each column in the previous matrix of text data. The matrix used to be made available as a text file dump and it took three minutes to download, parse with scripts I had written and then ported into a spreadsheet. I cannot believe they did this. I finally worked out a way to get the text data but it took some time and it still required a fair bit of manipulation. I hope the parsing code I wrote to do this will remain relevant for sometime. BLS – please don’t change the access again for a while!

Transition probabilities are calculated from Gross labour flows data which is available from the Data Retrieval App – provided (against better judgement) by the US Bureau of Labor Statistics. By way of refreshing your understanding, gross flows analysis allows us to trace flows of workers between different labour market states (employment; unemployment; and non-participation) between months. So we can see the size of the flows in and out of the labour force more easily and into the respective labour force states (employment and unemployment).

The various inflows and outflows between the labour force categories are expressed in terms of numbers of persons which can then be converted into so-called transition probabilities – the probabilities that transitions (changes of state) occur. We can then answer questions like: What is the probability that a person who is unemployed now will enter employment next period?

So if a transition probability for the shift between employment to unemployment is 0.05, we say that a worker who is currently employed has a 5 per cent chance of becoming unemployed in the next month. If this probability fell to 0.01 then we would say that the labour market is improving (only a 1 per cent chance of making this transition).

The following table shows the schematic way in which gross flows data is arranged each month – sometimes called a Gross Flows Matrix. For example, the element EE tells you how many people who were in employment in the previous month remain in employment in the current month. Similarly the element EU tells you how many people who were in employment in the previous month are now unemployed in the current month. And so on. This allows you to trace all inflows and outflows from a given state during the month in question.

The transition probabilities are computed by dividing the flow element in the matrix by the initial state. For example, if you want the probability of a worker remaining unemployed between the two months you would divide the flow (U to U) by the initial stock of unemployment. If you wanted to compute the probability that a worker would make the transition from employment to unemployment you would divide the flow (EU) by the initial stock of employment. And so on.

So for the 3 Labour Force states we can compute 9 transition probabilities reflecting the inflows and outflows from each of the combinations.

Analysing movements in these probabilities over time provides a different insight into how the labour market is performing by way of flows of workers.

I thought this graph was interesting – it shows the transitions for EU and UE from December 2007 (when the crisis hit the US labour market) up to March 2013.

The probability of an American (in general) losing their job if employed (blue line) rose throughout 2008 (peaking at 2 per cent in February 2009), slowly evened out and is now slowly falling (1.3 per cent in March 2013).

In December 2009, the chance of an unemployed American worker gaining employment was 27 per cent. This probability fell to a low of 15.4 per cent in October 2009, and scudded along at around 17 per cent through much of 2010-2011. It peaked again in September 2012 at 19.2 per cent, but as the impacts of the fiscal retreat are starting to impact, it has fallen again and is now at 17.9 per cent.

When I see behaviour like this the only conclusion is that the recovery has stalled and America is stuck in a vicious cycle of flat private spending and confidence and an unwillingness of the US government to stimulate sufficiently to fill the gap and create work.

The second graph compares the US transition probabilities for various months during the crisis up until March 2013 (see the accompanying Table for values). I have also jigged the vertical and horizontal scales to allow the changes in the columns to be seen more clearly. That is one of the reasons I also provided the raw data.

Several points by way of interpretation can be made.

First, the data shows that the slight improvement in the EE probability over 2010-2012 – that is, the likelihood an employment person will remain employed in the next month (not necessarily with the same employer though) – is now reversing. So the probability of remaining employed is falling once again.

Second, in terms of the previous graph which showed that the probability of EU (employment to unemployment) is also reversing as the economy slows, the way to understand these two trends is to realise that the probability of EN is also rising after initially falling during the early stages of the recovery.

That is, workers are not as likely to retain employment now relative to earlier in 2011 but are now increasingly likely to flow out of the labour force once they lose their jobs – that is, they become hidden unemployed.

Third, the likelihood of a new entrant getting a job (NE) is fairly flat after some initial improvement in 2010. But it still remains that new entrants are more likely to become employment (NE) than enter the labour force unemployed (NU).

Fourth, the probability of an unemployed worker remaining unemployed (UU) continues to improve, although the likelihood that such a worker will leave the labour force (UN) is higher than the likelihood of them getting a job (UE) and the former probability has risen sharply over the last 12 months, which is not a good sign (and is consistent with the continued deterioration in the participation rate).

Fifth, relative to 12 months ago, employed workers are less likely to remain employed now and when they lose their jobs they are more likely to exit the labour force (EN) than become unemployed (EU).

Overall, the Gross Flows data suggests the slight improvement in the US labour market during 2012 is now evaporating.

nment policy makers should be firmly focused on maximising the potential of its population. The sustainable goal should be the zero waste of people! This at least requires the state to maximise employment – which means provide work for all those who desire work at the current wages.

It should not mean anything less than that. Policy should always be consistent with that goal.

Once the private sector has made its spending based on its expectations of the future, the government has to render those private decisions consistent with the objective of full employment or else there will be national income losses and social dislocation.

Non-government spending gaps – defined as insufficient spending relative to what is required to sustain output at full employment levels – over the course of the cycle can only be filled by the government.

The national government always has a choice:

• Maintain full employment by ensuring there is no spending gap – that is run budget deficits commensurate with non-government surpluses; OR
• Maintain some slack in the economy (persistent unemployment and underemployment) which means that the government deficit will be somewhat smaller and perhaps even, for a time, a budget surplus will be possible.

It is here that I always make the distinction between a “bad” versus a “good” deficit and the distinction rests on understanding the automatic stabilisers.

The automatic stabilisers ultimately close spending gaps because falling national income ensures that that the leakages equal the injections – which means that the sectoral balances hold.

But in a period of spending decline, the resulting deficits will be driven by a declining economy and rising unemployment. Fiscal sustainability is about running good deficits to achieve full employment if the circumstances require that. You cannot define fiscal sustainability independently of the real economy and what the other sectors are doing.

The automatic stabilisers make a mockery of rule-driven budget targets. Once we focus on financial ratios – deficit to GDP ratios – public debt ratios – we are effectively admitting that we do not want government to take responsibility of full employment (and the equity advantages that accompany that end). That is why fiscal rules as stand-alone goals are meaningless or ideological.

Any financial target for budget deficits or the public debt to GDP ratio can never represent sensible policy conduct. The budget outcome is largely endogenous and thus driven by private spending decisions. It is highly unlikely that a government could actually hit some previously determined target if it wasn’t consistent with the public purpose aims to create full capacity utilisation.

In discussions of austerity there are often incompatible goals specified by proponents. The classic is their claim that austerity will allow both the private and public sector to reduce debt, when there is an external deficit. That is an impossible troika.

A national government in a fiat monetary system has specific capacities relating to the conduct of the sovereign currency. It is a monopoly issuer, which means that the government can never be revenue-constrained in a technical sense (voluntary constraints ignored). This means exactly this – it can spend whenever it wants to and has no imperative to seeks funds to facilitate the spending.

The real question is what are the limits on government spending? While a sovereign government is not financially constrained it is nonetheless constrained in real terms. It can only buy what is available for sale. Unemployment is a sign that at least one resource is available for sale.

Conclusion

The American government should go back to basics and learn these simple points. Their nation would be a lot better off if they did. They are in danger of following the UK down the slowdown-then-recession path.

In the longer-term, the US economy is in danger of destroying its middle class and further impoverishing its underclass – which I take it would destroy the “American dream”.

The numbers that appear in budget statements are not costs. The cost of a program are the extra real resources required for implementation. Persistently high unemployment means an abundance of underutilised real resources available – which means the opportunity costs are very low to non-existent.

The labour force data for March 2013 should be sending a strong signal to all US politicians that things are getting worse again.

That is enough for today!