We Have A Debt-Ceiling Deal. The Economy Loses.

Earlier this week the absurd and totally unnecessary debate in Washington over raising the national debt-ceiling came to an agreement, both houses of Congress passed it, and the President signed it.  Earlier this week I gave this metaphor for the deal, wondering why we need enemies with “friends” like our representatives in Washington.  Now that I’ve had a little more time to reflect, read some more on the details, comment on radio & TV about it, I think I was too easy on it.  It’s worse than it first appears.

This deal doesn’t “guarantee” that the U.S. government will reduce it’s deficit and maintain “solvency” (a non-concept for a sovereign country with a central bank).  Instead, this deal is more likely to guarantee that our economic non-recovery does, indeed, become at least a lost decade, if not a depression.  Right now I want to look at the economic impact of the deal.  In another post I’ll look at another casualty of the deal and the probably political-economy impact.

So what does the deal do specifically?  Well the details are fairly complex, even by Washington standards.  Right now the debt ceiling rises by $400 billion – enough to last for probably 3-4 months.  No real cuts will happen for maybe 60 more days.  Then starting in October 2011, which is the start of the government’s fiscal year 2012 budget (see here for definition of fiscal year), the action begins. Caps on spending start.  There are no tax or revenue changes in the deal.  It starts modestly with only $21 billion in spending cuts in 2012, although many of those cuts will be felt painfully by many citizens.  Students in graduate school in particular will feel the pinch in their pocket. Then in the remaining 9 years of the deal, there will be at least another $896 billion in reduced spending, amounting to about $100 billion less spending per year than currently planned.

This total of $917 billion in reduced spending is only the start though.  Congress is going to appoint a “special joint committee” of 12 members to recommend and additional $1.2-1.5 trillion in either spending cuts or tax revenue increases over the next 10 years.  (if you believe that committee with half Republicans will allow any revenue increases, I have a bridge in Brooklyn for sale).  If Congress doesn’t adopt those cuts, then Medicare payments, defense spending, and other discretionary spending would automatically by cut across the board. Either way spending gets cut another $1.2 trillion for the years 2013-2022.

This deal is supposed to raise the debt ceiling enough to get us through the end  of 2012 and the presidential election before the debt ceiling has to be raised again, sparing us this debate.  Don’t bet the your house on that though because House Republicans are betting they can keep this debate alive through then.  Basically Congress has created an elaborate mechanism in this law that increases the debt ceiling in several steps between now and the end of 2012.  But the way it’s done is that the debt ceiling keeps going up unless Congress votes to stop it (which the President would then veto).  It’s  a way for Republicans to keep talking about the debt and deficit, to keep recording “votes” against it, but all the time knowing that the debt ceiling will rise because it has to.  Pure politics at the expense of the country.

Right now the economy has over 9% unemployment.  Inflation is so low that deflation is actually the threat. The economy has effectively stalled or at least reached “stall speed”, threatening another double-dip recession.  This is not the time to be cutting spending.  To the degree spending cuts are necessary, they should happen when the economy is at or nearing full employment, not now.  At this time the economy needs all the spending it can find whether it’s from consumers, firms, or government.  And right now, firms and consumers are pulling back and keeping their wallets closed.  The government needs to step up and fill the gap.

So bottom-line, what should we expect?  I’ve seen several estimates from folks with more sophisticated econometric models than I can access.  My own back-of-the-envelope calculations and intuition say the drag on the economy is significant.  In 2012, this deal is probably going to take up to another 0.4 percentage points off of GDP growth.  The real damage starts in 2013 with a reduction closer to 1%.  Remember we’ve only grown at 0.8% rate so far in the first half of 2011, so 2012 will be close to zero growth and 2013 will likely be negative unless some other source of growth and spending can be found.  Looking around, it’s hard to imagine where that could be.  Instead I see nothing but possible negative risks: Europe imploding in a currency and austerity crisis, China having to pull back to slow their inflation, the housing mess in the U.S. is still bad, U.S. banks aren’t as healthy as they claim.

The estimates I’ve seen are similar.  Economic Policy Institute says the debt ceiling deal with cost us 1.8 million jobs in 2012 alone. The same article reports:

Top economists and CEO’s have also weighed in against the deal and said that GOP concessions to the Tea Party will cost our economy dearly. Pimco CEO Mohamed El-Erian warned that the deal will lead to less growth, more unemployment, and more inequality. Nobel Prize-winning economist Paul Krugman called the plan “a disaster” and “an abject surrender” that will “depress the economy even further.”

The Center for American Progress’s Michael Ettlinger and Michael Linden argue that while the deal “goes straight in the wrong direction,” Congress can redeem itself by using the so-called “super committee” mandated by the bill to focus on job creation. The committee, made up of six Republicans and six Democrats, is tasked with finding an additional $1.5 trillion of deficit reduction over the next 10 years, and must report a plan by Thanksgiving.

It’s noteworthy that J.P.Morgan Chase Bank’s research department, as representative of Wall Street as any, says that overall with this deal, government budget policy in 2012 subtract at least 1.5% points from GDP growth rate in 2012.  Since  it takes at least 2% growth in GDP to keep unemployment stable and we haven’t even had a single quarter of growth at more than a 4% rate since the end of 2006, things look grim for employment.

The cutters and austerians have won.  They will make a wasteland of the economy in the name of fighting the deficit.

There Is An Efffective Way to Reduce Government Deficit: Employment. But They Won’t Take That Route.

In the whole crazy, unnecessary debate over raising the debt-ceiling law, politicians, reporters, and commentators all spoke as if there were only two ways to reduce the government deficits.  Nearly everyone took it as an article of “serious thinking” that to reduce a deficit requires either reducing spending or increasing taxes.  But rather than being evidence of “serious thinking”, such talk is evidence of sloppy, imprecise, and ignorant thinking.  Such talk totally ignores the role of economic growth in determining government budgets and it ignores the role of the government in the economy.  It’s evidence of the government-as-household fallacy, the idea that government is just like a big household and subject to the same constraints as you and I.

There is a way to balance the budget that doesn’t require cutting major spending programs.  And it doesn’t require big tax increases.  It’s called economic growth and putting people back to work.  The major cause of the deficit is because we have very high unemployment.  We have over 9% reported unemployment.  That number rises to approximately 16% if we count all the people working part-time jobs but that desperately want full-time work and more hours.  And finally, both numbers totally ignore the fact that since we fell into this depression in 2007 well over 5% of adult Americans have chosen to drop out of the labor force altogether for now.  If we put those people back to work, they pay taxes. Government revenues will increase even without a tax rate increase.  If we put those people back to work, then government spending on unemployment compensation, Medicaid, welfare, and a host of other safety net programs goes down.  Automatically. Without cutting any programs or harming anyone.

This idea that economic growth and full employment will reduce deficits isn’t some theoretical possibility that only exists in the models of some economists.  We’ve done it before.  Other countries have done it.  In fact, everytime the U.S. has reduced it’s deficit it’s been by increasing employment.  The route to a small deficit or even a balanced budget lies in achieving full employment first, not in contrived artificial balanced budget amendments.

It wasn’t until the debt-ceiling debate was practically finished (for now – it will be back like zombie or vampire) that any in the media took notice that growth and employment is the key.  Last Sunday, July 31, as the President and the Republican Speaker announced their deal to cut spending and raise the debt ceiling, the New York Times finally runs a decent article about how growth is the real answer (bold emphases are mine):

 We wouldn’t need any of that [reduce spending, raise taxes, inflation, or default] if we could restore economic growth. If that happened, Americans would become richer and pay more taxes. Et voilà! — we’d pay down the debt painlessly.

Crazy as that might sound, particularly given Friday’s figures, the possibility isn’t some economic equivalent of that nice big farm where your childhood dog Skip was sent to run free. There are precedents.

Before its economy crashed, Ireland was a star of this sort of debt reduction. In the 1980s, Ireland’s debt dwarfed its economy. Over the next two decades, though, that debt shrank to about a quarter of gross domestic product, largely because the economy went gangbusters.

“Ireland went from being, you know, the emerging market in a European context, to a very dynamic economy,” says Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics and co-author of “This Time Is Different,” a history of debt crises.

The United States has done the same in the past, too. After World War II, gross federal debt reached 122 percent of G.D.P., the highest ratio on record. But over the next 40 years, it fell to about 33 percent. That wasn’t because some blue-ribbon panel prescribed austerity; it was because the American economy became much, much richer.

The same happened during the prosperous 1990s, which began with deficits and ended with surpluses. Former President Bill Clinton is often credited for that turnabout, as he engineered higher tax rates. But most economists attribute the surplus years primarily to extraordinarily rapid growth.

It would be lovely to repeat that experience today, and send our federal debt off to that farm with Skip…

Usually after a recession, growth snaps back quickly and the economy makes up for ground lost — and then some. That’s not the case this time, at least so far. In the 60 years before the Great Recession, the economy expanded at an average annual rate of 3.5 percent. In the second quarter of this year, it grew at less than half of that pace, putting us further and further behind where we would be if the economy were functioning normally.

Unfortunately the article still tries to give the reader the impression that growth/full employment is difficult or unlikely this time.  It tries to give the impression that the growth during the Clinton years was somehow extraordinarily fast.  It was only fast by comparison with either the Bush I, Bush II or the first Reagan terms.  In fact, the growth during the Clinton years was only average at best when compared to what was achieved routinely during 1950-1973 or even during the Carter years.  The article also falsely claims that our “aging population” will require unusually large demands on government resources.  In fact the demands of the aging baby boomers on either Social Security or Medicare aren’t any greater than the resources we devoted to educating those baby boomers in the 1950’s and 1960’s.

Nonetheless, the point of the article is right on:  growth and growth in employment is the way to go if you’re worried about the deficit & debt (which I’m not, but that’s another issue).  The deficit we have is a jobs deficit, not a fiscal or budget deficit.  That’s what we need to worry about.

Washington and the chattering political classes have it wrong.  Their “serious” talk is anything but.

America Flatlines – Employment Report for June 2011

The “recovery” is flat-lining. The employment report for June shows the continuing bad news.  I’ll let CalculatedRisk give us the facts:

From the BLS:

Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major private-sector industries changed little over the month. Government employment continued to trend down.

The change in total nonfarm payroll employment for April was revised from +232,000 to +217,000, and the change for May was revised from +54,000 to +25,000.


The unemployment rate increased to 9.2% (red line).

Percent Job Losses During Recessions…graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses. The dotted line is ex-Census hiring.

The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early ’80s recession with a peak of 10.8 percent was worse).

This was very weak and well below expectations for payroll jobs, and the unemployment rate was higher than expected (both worse). A terrible report.

Although the Wall Street types and other analysts “expected” a better report, this really isn’t surprising. What it shows is the effect of fiscal policy. For over a year now, the actual effect of fiscal policy has been contractionary.  Despite the misleading rhetoric of the Republicans, the Tea Party types, and the President, government spending has not been increasing for at least a year.  The stimulus is over. It was done awhile ago.  And it wasn’t much of a stimulus anyway relative to the scale of the problem.  In fact, the federal government surge in spending in 2009, the so-called “stimulus” wasn’t really a stimulus.  It was an attempt to limit and delay the damage from massive state and local government spending cuts.

You would think that month-after-month of poor employment and job reports like we’ve seen this year would cause somebody in official Washington to be concerned.  You would be wrong.  Instead, the talk is all about how to cut spending further, faster, and deeper.  Apparently 9.2% unemployment rate, no real increase in the number of employed, and 545,000 new unemployed people is just fine and dandy with official Washington.

The Economy Is Stalling – Employment Report for May 2011

First the facts and then my comments.  Calculated Risk Blog reports from the BLS:

From the BLS:

Nonfarm payroll employment changed little (+54,000) in May, and the unemployment rate was essentially unchanged at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains continued in professional and business services, health care, and mining. Employment levels in other major private-sector industries were little changed, and local government employment continued to decline.

The change in total nonfarm payroll employmentfor March was revised from +221,000 to +194,000, and the change for April was revised from +244,000 to +232,000.

The distressing news here isn’t so much the rise in unemployment rate from 8.9% to 9.1%.  Given the margin of error in measurement*, the unemployment rate has essentially been 9% for the last few months.  The distressing part is three fold.  First, the number of net new jobs created was only 54,000.  We need at least 150,000 and closer to 180,000 net new jobs each month to keep pace with population growth.  54,000 is simply not enough.  What’s worse, it’s a very significant drop from the March and April levels with no obvious explanation other than the economy overall is seriously slowing down.

The second distressing item is the revisions to the April and March numbers.  Normally previous months’ numbers are revised as the Bureau gets more and better data.  But revisions typically aren’t very large and may be either up or down.  But to have 12% and 4% downward revisions to the previous two months means the mild optimism folks were expressing two months ago was misplaced.

Finally, the most distressing part news, but totally unsurprising, is that local government employment (think teachers and police) continues to decline and be a significant drag on the economy as state, local, and the national government continue to think they can cut their way to prosperity.  They can’t.  There’s no history or empirical evidence that shows drastically cutting government spending in the middle of a significant slump will bring prosperity.  Quite the contrary, we have extensive theory and evidence that says cutting government spending in the middle of a slump will make the slump worse, make unemployment higher, and actually increase the government’s deficit.

So just how bad is this continuing failure to recover from the Great Recession of 2007-09?  Again Calculated Risk obliges with a great graphic.  This graph compares each official recession since the end of World War II.  It plots the percentage decline in total employment (the loss of jobs!) by month and then shows how long it took to recover employment.  At the rate we are “recovering” (it’s not really a recovery!), it will be many years before we again get back to the employment levels we had when this disaster began to unfold in 2007.  Without major changes in policy direction, we are definitely facing a lost decade for the U.S.

There are a total of 13.9 million Americans unemployed and 6.2 million have been unemployed for more than 6 months. Very grim numbers.

Overall this was a weak report and reminds us that unemployment and underemployment are critical problems in the U.S.

Percent Job Losses During Recessions

Percent Job Losses During RecessionsClick on graph for larger image in graph gallery.

This graph shows the job losses from the start of the employment recession, in percentage terms – this time aligned at the start of the recession. …

In terms of lost payroll jobs, the 2007 recession is by far the worst since WWII.

* for a more detailed explanation of how to read unemployment rate and employment numbers, see these four posts on the Employment Muddle Part I, Part II, Part III, Part IV.

Ruh-Roh Raggie, Trouble On Employment

Well while I’ve been away from posting the last few weeks, things are starting to not look good.  Two months ago I was concerned that the “recovery” was going to proceed at a normal growth rate and effectively close out those already unemployed from employment.  I even have a draft long post about it called “The Invisibles” which I still hope to finish. But recent indicators show the economy may be slowing even further.  We may be approaching “stall speed” where policy controls get sloppy and the whole thing crashes, again.

Today, the weekly report on new unemployment claims was still poor.  I’ll let Calculated Risk explain:

The DOL reports on weekly unemployment insurance claims:

In the week ending May 28, the advance figure for seasonally adjusted initial claims was 422,000, a decrease of 6,000 from the previous week’s revised figure of 428,000. The 4-week moving average was 425,500, a decrease of 14,000 from the previous week’s revised average of 439,500.

The following graph shows the 4-week moving average of weekly claims for the last 40 years.

Weekly Unemployment ClaimsClick on graph for larger image in graph gallery.

The dashed line on the graph is the current 4-week average. The four-week average of weeklyunemployment claims decreased this week to 425,500.

This is the eight straight week with initial claims above 400,000, and the 4-week average is at about the same the level as in January when there were fewer payroll jobs being added.

This is a notoriously “noisy” data series, meaning it’s highly volatile and jumps around a lot.  But after 8 straight weeks at the elevated 400,000+ level, we can conclude it’s not just noise.  There’s a signal here.  Layoffs are resuming.

Yesterday’s ADP private payrolls estimate was also very weak.  Again Calculated Risk:

ADP reports:

Employment in the nonfarm private business sector rose 38,000 from April to May on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from March 2011 to April 2011 was revised down slightly to 177,000 from the previously reported increase of 179,000.

May’s ADP Report estimates employment in the service-providing sector rose by 48,000, marking 17 consecutive months of employment gains while employment in the goods-producing sector fell 10,000 following six months of increases.Manufacturing employment fell 9,000 in May following seven consecutive monthly gains.

Note: ADP is private nonfarm employment only (no government jobs).

This was well below the consensus forecast of an increase of 178,000 private sector jobs in May.

This doesn’t bode well for tomorrow’s official May employment situation report.  For more background on what these stats mean, see my series from February here, here, here, and here.

Employment Report – Feb

The February 2011 employment report is in.  I’ll let Calculated Risk summarize, but the bold emphasis is mine:

The BLS reported that payroll employment increased 192,000 in February and that the unemployment rate declined to 8.9%. If we average the last two months together – the 63,000 payroll jobs added in January and the 192,000 payroll jobs in February – there were 127,500 payroll jobs added per month. That is a barely enough to keep up with the growth in the labor force. Private payrolls were a little better at an average of 145,000 per month, as state and local governments continued to lay off workers (something we expect all year).

The decline in the unemployment rate from 9.0% to 8.9% was good news, especially since the participation rate was unchanged at 64.2%. More welcome news included the decreases in the number of long term unemployed, a slight decline in the number of part time workers for economic reasons, and the decline in U-6 to 15.9% – although the levels are still very high….

Overall this was a small step in the right direction, but the overall employment situation remains grim: There are 7.5 million fewer payroll jobs now than before the recession started in 2007 with 13.7 million Americans currently unemployed. Another 8.3 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6 million have been unemployed for six months or more….

Overall this was a small step in the right direction, but the overall employment situation remains grim: There are 7.5 million fewer payroll jobs now than before the recession started in 2007 with 13.7 million Americans currently unemployed. Another 8.3 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6 million have been unemployed for six months or more.

…. Also state and local government cutbacks negatively impacted the employment report – with more to come…

State and local governments reduced employment by 30,000 in February, and several state budgets were in the news, especially the ongoing Wisconsin political battles…
Percent Job Losses During Recessions

The graph shows the job losses from the start of the employment recession, in percentage terms – this time aligned at the start of the recession.

Here are the employment posts yesterday with graphs:
Employment Summary and Part Time Workers, Unemployed over 26 Weeks

Duration of Unemployment, Unemployment by Education, Diffusion Indexes

And some analysis on the participaton rate: Participation Rate Update

Readers might remember what a muddle the January report was (see here, here, and here) due to the conflicting reports of the two primary surveys and the snow which happened in January during the survey period.  If we average January and February together, it appears that the January report was somewhat negatively impacted by the weather.  However, putting the two months together still leaves us with a picture that, yes, is improving. But it is still improving much, much too slowly.  It will still take at least 2-3 years, if not longer at the current pace to get back to full employment.  Deeper inside this month’s report the numbers on private hiring are finally starting to look better (although they’ve done even better in past recessions).  Now we need to worry about the declines in government employment, particularly state and local government.  All those teachers, police officers and fire fighters count as employees too.  And their money and spending is just as critical to the economy as money from private employees.

Employment News – A Muddle Part 4

The government monthly “Employment Situation Report” from BLS on the first Friday isn’t the only game in town for understanding what’s happening to employment. There are alternative data series that makes the news that can help give us some idea of what’s happening in employment. None of these data series is as comprehensive or reliable as the BLS series, but they do offer alternative data for reasonableness.  After all, as we say in part 1 and part 2 of this series, the BLS data is far from straightforward and can often give fuzzy or contradictory signals.

In addition to the BLS series there is:

  • The ADP Private Sector Employment report. ADP is a private data processing company whose core business is processing payroll for thousands of companies in all types of businesses. Because of their large market share in this area, they are privy to exact counts of workers (payroll checks) each month.  They have models that extrapolate from their client firms to the entire private sector as a whole.  This data series is usually released on the Wednesday before the BLS release on first Firday. An example is report for January 2011 is here.
  • The  U.S. Department of Labor provides a weekly release of the Unemployment Insurance Weekly Claims Report. An example for last week is here. This is the sum of all the individual state unemployment claims data. Note: BLS monthly report is unrelated to any state-level unemployment compensation claims.  This report, while there is a Seasonally Adjusted series as well as NSA series, is notoriously “noisy”, meaning there’s a lot of variation from week-to-week. It is extremely sensitive to things like bad weather causing newly unemployed workers to wait until Monday to file instead of doing it on Friday. Nonetheless, looking at the 4-week moving average is sometimes helpful.  Here’s a graph of recent behavior in this series, courtesy of Calculated Risk:

The DOL reports on weekly unemployment insurance claims:

In the week ending Jan. 29, the advance figure for seasonally adjusted initial claims was 415,000, a decrease of 42,000 from the previous week’s revised figure of 457,000. The 4-week moving average was 430,500, an increase of 1,000 from the previous week’s revised average of 429,500.

Weekly Unemployment ClaimsClick on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims for the last 10 years. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week by 1,000 to 430,500

  • Finally, there’s a relative newcomer in town, the Gallup Poll series. Gallup, the famous polling organization has in recent years been conducting surveys of households to determine an unemployment rate.  The definitions and techniques are not strictly comparable to the BLS CPS survey each month, but it provides another checkpoint.  Here’s a recent example:

PRINCETON, NJ — Unemployment, as measured by Gallup without seasonal adjustment, remained at 9.6% in mid-January, the same as at the end of December. This marks a one-percentage-point improvement from 10.6% in mid-January 2010.

Gallup's U.S. Unemployment Rate, January 2010-January 2011 Trend