{"id":10670,"date":"2010-07-13T16:13:59","date_gmt":"2010-07-13T06:13:59","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=10670"},"modified":"2010-07-13T16:13:59","modified_gmt":"2010-07-13T06:13:59","slug":"employment-gaps-a-failure-of-political-leadership","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=10670","title":{"rendered":"Employment gaps – a failure of political leadership"},"content":{"rendered":"

\t\t\t\tOvernight a kind soul (thanks M) sent me the latest Goldman Sachs US Economist Analysis (Issue 10\/27, July 9, 2010) written by their chief economist Jan Hatzius. Unfortunately it is a subscription-based document and so I cannot link to it. It presents a very interesting analysis of the current situation in the US economy, using the sectoral balances framework, which is often deployed in Modern Monetary Theory (MMT). While it relates to the US economy, the principles established apply to any sovereign nation (in the currency sense) and demonstrate that some of the top players in the financial markets have a good understanding of the essentials of MMT. But the bottom line of the paper is that the US is likely to have to endure on-going and massive employment gaps (below potential) for years because the US government is failing to exercise leadership. The paper recognises the need for an expansion of fiscal policy of at least 3 per cent of GDP but concludes that the ill-informed US public (about deficits) are allowing the deficit terrorists to bully the politicians into cutting the deficit. The costs of this folly will be enormous.
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\nThe GS briefing is entitled – Why Is the Economy So Weak? What Can Policy Do?<\/em> and examines:<\/p>\n

\n… two of the most basic questions about the economic outlook in the context of a “financial balances” framework. First, why have US growth and employment been so weak since 2007? And second, what can policymakers do about it?\n<\/p><\/blockquote>\n

They begin by emphasising the “unprecedented jobs shortfall”. So for those who consider that employment should not be a central concern of the policy debate or that Americans do not think employment is an issue at present at least the economists at GS would disagree.<\/p>\n

By motivating their discussion with a very scary presentation on how far the US labour market is from its past performance levels in terms of employment growth, the GS economists are clearly indicating that they consider the lack of jobs to be a central policy issue.<\/p>\n

They present this graph (reproduced from their paper) to show the jobs shortfall.<\/p>\n

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The graph shows:<\/p>\n

\n… the extent to which the recent recession and its aftermath have diverged from postwar experience by plotting the level of nonfarm payroll employment against prior postwar cycles, starting from the peak of the business cycle (i.e. the start of the recession). Relative to the start of the recession, the level of employment payrolls is now about 8% lower than in the median cycle of the 1954-1982 period. Scaled to the current level of the labor force, this is a shortfall of roughly 10 million jobs.\n<\/p><\/blockquote>\n

So when you read about the historically high budget deficits (as if they matter per se<\/em>. Not!) the magnitudes involved shouldn’t surprise you given how great the plunge in employment has been in the US in this recession.<\/p>\n

As the GS paper says – there is an unprecedented jobs shortfall.<\/p>\n

The latter takes taxpayers out of the picture and via the automatic stabilisers drives the deficit up. The real problem is the employment shortfall which is stark and reflects a monumental failure of policy.<\/p>\n

They note that this has been an “unusually deep recession and an unusually weak recovery”, which have combined to create this unprecendented jobs gap. In saying this they reject the views of many mainstream economists who believed that there would be a V-shaped recovery even without government fiscal support. Implied, is a rejection of austerity approaches which are now gaining favour among policy makers across the world.<\/p>\n

The GS paper says:<\/p>\n

\nThe sheer size of this gap suggests strongly that the cycle is fundamentally different from its postwar predecessors … at the most basic level, we view the distinguishing feature of the current cycle as a collective attempt by the different sectors of the economy-households, firms, governments, and the rest of the world-to reduce their debt loads by pushing spending below income. This does not mean that every sector is trying to run a surplus – as is well known, the US federal government is currently running a large deficit and planning to do so for many years. But it means that those sectors that are running deficits are moving less aggressively than those that are running surpluses. This implies a demand shortfall for the economy as a whole.\n<\/p><\/blockquote>\n

This is a very meaningful statement. It draws on the sectoral balances framework and interprets outcomes within that framework to the state of aggregate demand (spending) overall.<\/p>\n

To refresh your memory (again, sorry! – skip through this if you know it by heart), the balances are derived as follows. The basic income-expenditure model in macroeconomics can be viewed in (at least) two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.<\/p>\n

From the sources perspective we write:<\/p>\n

GDP = C + I + G + (X – M)<\/p>\n

which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).<\/p>\n

From the uses perspective, national income (GDP) can be used for:<\/p>\n

GDP = C + S + T<\/p>\n

which says that GDP (income) ultimately comes back to households who consume (C), save (S) or pay taxes (T) with it once all the distributions are made.<\/p>\n

Equating these two perspectives we get:<\/p>\n

C + S + T = GDP = C + I + G + (X – M)<\/p>\n

So after simplification (but obeying the equation) we get the sectoral balances view of the national accounts.<\/p>\n

(I – S) + (G – T) + (X – M) = 0<\/p>\n

That is the three balances have to sum to zero. The sectoral balances derived are:<\/p>\n