You Can Believe in the Terribleness of Bubbles and Bursts, or That We Are Facing Mainly Cyclical Unemployment Only, But Not Both

Today I'm giving a lecture on unemployment - and a portion of it will be devoted to this year's hot debate about whether or not our unemployment situation is mainly a cyclical or structural problem.  Many economists, even those in the mainstream who have always been loathe to think about the importance of bubbles and their formation, believe that one of the causes of the crisis or at least one of the aides of it was the forming of the housing bubble over the previous decades.   Many of these same economists say though that our unemployment problem is mostly just good ole' 'not enough demand' cyclical unemployment.  My questions is, and this is aimed at Krugman, if it was wrong for the Fed in 2002 to create one bubble to 'correct' the burst of the other, why is it correct today?  You can't believe bubbles (of the scale we had seen peaking in 2007) are bad, and then essentially opt to throw more money at it and potentially re-inflate it or a new one.  Bubbles are, by definition, structural issues - and their implosion creates structural deficits of employment etc.

There is but one conclusion:  Krugman and his ilk either don't really believe bubbles and bursts (either in the vein of Austrian or in the vein of Minsky) are all that scary for economics, or he is simply choosing to ignore the structural problems and unemployment they cause because it doesn't fit his ideology.   Seems likely to me that there is a mix of structural and cyclical unemployment going on - whether one egged on the other, I don't know - but regardless, you can't fight bubbles and cyclical unemployment at the same time.

By easing one, you risk creating or enhancing the other - that is the problem economists now face.

Brad Delong, in denouncing unexciting alternatives, promotes the same unexciting alternatives...

Brad posts about the Obama administration's apparent lack of exciting ideas. 

In it, he promotes 4 ways the administration could have (could still) improved employment:

1. Expansionary fiscal policy: convince congress to appropriate more money and borrow-and-spend.
2. Expansionary monetary policy: staff up the Federal Reserve with governors who believed that large-scale quantitative easing and inflation, price level, and nominal GDP targeting were worth attempting.
3. Use the TARP and the Treasury's powers to offer bank guarantees to engage in large-scale quantitative easing by the executive branch.
4. Focus on putting into place long-run policies to balance the federal budget, and hope that their passage induces the confidence fairy to show up.

Maybe I'm daft, but didn't the Bush and Obama (combined) administrations do all 4 already?  They did the fiscal policy (ARRA), the Fed has been aggressively using non-traditional monetary tools, they already have been supporting banks and given bank profits recently I don't think bank lending is the crux of the problem anymore anyway, and hasn't Obama already touted his long-run sense of balance?

Delong offers up no exciting alternatives - he's no different than Obama.  

I may disagree with them, but you can't deny some post-Keynesian's alternative of direct government hiring of unemployed persons - it's an exciting idea.   What about mandating a temporary national wage re-structuring to try and get the invisible hand working again?  What about taking the money out of China that they stole from the US through their deceptive currency policies?   What about taking the unused ARRA / TARP monies and using it to fund appropriate (re)education programs to help with some of the potential structural unemployment potentially underlying our present problem.   

I don't necessarily support all the above ideas - in fact, some of them may be bad ideas - but they are different - they are exciting.   Obama, Delong, Krugman - they all just want the same old kindergarten Keynesian spending.  And while I may have even been somewhat sympathetic to that in the past, I've learned since this recession, that the government not only shouldn't but literally CAN'T simply rely on the Keynesian multiplier to lead us out of the depths - our government simply isn't set up to do that correctly.  It is too beholden to interests and lobbyists, it is too inefficient, it is too slow....

Is Education the Key?

Hunter Richards recently asked me to comment on an article post entitled "Technology, Unemployment and Our Children's Future" on the blog Software Advice of which he is a contributor.  I actually find the site interesting for reasons completely unrelated with my econ-geekiness, and that is my Microsoft Dynamics CRM-geekiness, which they post often about. This particular post though enters a bit more into the philosophical / subjective realm of macroeconomics.

The main point of the blog article is that, technology is growing - and the demand for it will continue to grow.  IE, our national economy is now entirely led by changes in technology and new discovery, and unless we fix our educational system to match that demand for highly skilled technological knowledge, we will continue to flounder well below our potential.

I agree entirely.  Education systems are not a problem.  They are the problem.  Health care issues are spit-drops into an empty bucket - education is the water that is missing.   Other more eastern countries (China comes to mind) take education, particularly in math and science, more seriously.  They go to school many more days out of the year than we in the US do.  Many eastern children are, arguably, more strictly coached on its importance, than we are.

Economists debate the degree to which structural unemployment vs. cyclical unemployment is the real problem in our present economic climate.  I've posted before that I believe it to be a good degree of both - and research seems to be bearing that out.  But to the degree that it is more than just weak demand that is at fault, to the degree that we are undergoing a significant structural realignment away from low-skilled manufacturing and construction to high-tech manufacturing, life-science, etc., then we are going to need to re-design our educational system as well to meet these needs.

Some states, like my own perhaps, already sees this need.  Our Governor in the State of Indiana, Mitch Daniels, is making it his number one priority before he leaves office, saying in part at the recent State of the State address:

"Already, I have ordered our Board of Education to peel away unnecessary requirements that consume time and money without really contributing to learning. We are asking this Assembly to repeal other mandates that, whatever their good intentions, ought to be left to local control. I am a supporter of organ donation, and cancer awareness, and preventing mosquito-borne disease, but if a local superintendent or school board thinks time spent on these mandated courses interferes with the teaching of math, or English, or science, it should be their right to eliminate them from a crowded school day."

But individual states can only do so much.  In a nation polarized by ideology, focused on health care issues, green issues, retirement issues, education often gets left behind - along with the children of the US.

I don't necessarily agree with every causal link made in Mr. Richards article - correlation does not equal causation.  For example, I don't believe corporate profits are a 1:1 byproduct of technological growth / productivity growth.  For my money we have other worrying concerns about the formation of demand-led bubbles and the state of our financial system (along with our education system) which we need to also focus on to help address some of the disparities of income distribution in this country.   But, I do believe education is the single most important, most ignored issue facing the United States in this global economy, and one that, if President Obama continues to push off as a lower priority, I feel may not improve our chances against our emerging global competitors.

We don't have to be like China - we don't have to be a nation of cold-hearted 'tiger moms' whose children commit suicide because of all the drilling and lack of having a real life - but we do need to find a better balance - and we need to get our priorities straight.

Strange Comment from the AP about Unemployment % Calculation

I was reading along about the recent reduction in unemployment to 9.4% (which one must take with a grain of salt due to the holidays).

And then I get to this:

Another key reason for the drop in the December unemployment rate was that the government no longer counts people as unemployed when they stop looking for work.

Maybe I'm missing something, but that is not anything new.  The government has always (or at least as long as I've been alive), excluded those people who weren't looking for a job from unemployment calculations.

???

UPDATE:
On the power of words.....
I read the article as if there was some technical BLS change.  As it happens, and as I reread this 10 times to figure out what was going on, it appears they meant :

"Another key reason for the drop in the December unemployment rate was that the government stops counting no longer counts people as unemployed when they stop looking for work."

The original wording, while technically correct I suppose when read the way they meant, could easily be misinterpreted to mean the government has changed its methodology.  As I've read user comments regarding this widely distributed article, it seems I'm not the only one who misread this.  That's unfortunate because I think that futher erodes economic education of the masses.

Or, maybe it's just me and I'm having a bad day at reading comprehension ;)

UPDATE 2:
Somewhat to my shock, MSNBC has quickly responded to my inquiry and has agreed the wording is "awkward."  They have since changed to :

"However, the drop in the unemployment rate for December can partly be explained by a drop in the number of people considered to be in the labor force. That could be because some people gave up on finding a job. A person is no longer counted as unemployed if they are no longer looking for work."

That's one news organization---but that language was copied widely (which is what made me think it was AP).  Kudos to MSNBC though for that, and for the great reader service.

A reason for sticky prices

Menu costs, yadadada.  I've always thought that was a rather weak explanation for sticky prices.  I think a better one, and one that I don't think has been researched much (anyone know of anything?) is the private industry decision to cut product size and keep price roughly the same.

How many of you, when you go grocery shopping, check the prices of the things you buy?  I bet about 100% of you 100% of the time.  How many of you, on those same trips to the store, check the size/volume of the things you buy?  I bet roughly none of you.  I know I don't usually unless it's glaring.  

All a company has to do is reshape a plastic mold here or resize a box there and voila, instant  volume reduction.  And due to the asymmetric information whereby the company knows what is changed and the consumer doesn't, huge inefficiencies are created - goods are purchased out of habit and the reduction in the amount of product for the same price is missed by the consumer.  All this affords a company to gain roughly the same amount of revenue at a lower cost of production - which is great in down economic times.