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August 16, 2005
WSJ Econoblog: Altig, Sawicky, and Walker
Definitely worth your time. This Econoblog installment is titled "Debating Job-Market Slack" and features Dave Altig of macroblog taking on Max Sawicky and Tom Walker of MaxSpeak, You Listen! First a quote from Sawicky and Walker:
Finally, rather than dwelling on discrepancies in labor force participation rates, it may indeed make sense, as David suggests, to consider the choices of workers and nonworkers. It doesn't follow, however, that those choices have been made enthusiastically.
Good point. While pgl of Angry Bear has been claiming that labor force participation and employment/population ratios have been lagging, I have admitted to being less concerned. I have been very intrigued by the whole situation, however, and posted some questions that have been raised in my mind and taken a preliminary shot or two at trying to figure out what is going on. If it appears that I've been dwelling on those rates, it's mainly because I've been trying to drill down into the demographic issues. In the end, I am most sympathetic to James Hamilton's approach and position. Undoubtedly the LFPR is a function of people's choices, but whether those choices are being made "enthusiastically" or not is a sticky wicket. Altig responds:
But at this point we may want to introduce another paradigm-shifting idea, the real business cycle concept that (in part) won the 2004 Nobel Prize for Finn Kydland and Ed Prescott. (A second mention for Arizona Sate University!) My simple-minded version of Kydland and Prescott's story goes like this: Sometimes the sun shines, sometimes it rains. We may like it better when the sun shines, but the rain, too, is part of the natural order of things. And there is nothing policy makers can or should do about it.
Whether you like the theory or not, that's a pretty nice statement of the theory. And then...
So, yes, a voluntary decision about seeking work or not seeking work is not the same thing as a happy decision. But it does not follow that all unfortunate circumstances are the appropriate objects of economic policy.
To which Sawicky and Walker respond:
Some unfortunate circumstances are the result of economic policy and others can be ameliorated in a way that actually contributes to efficiency. It would be irresponsible to do nothing in response to the former and unwise to do nothing in the latter circumstance.
Ah, but telling the difference is the tricky part. Back to Altig:
Perhaps it is because I am a child of the 1970s -- the decade in which I became familiar with the larger world around me -- that my instinct is to respond to this type of uncertainty with a certain reluctance to espouse activist policies unless the evidence pretty clearly speaks to the need. To my eye, that evidence is lacking for the moment.
On balance, I'd have to agree. Changing demographics and educational choices by young people account for some (though probably not all) of the lagging LFPR. Also, I'm not sure we totally understand the dynamics of very shallow recessions. The last two recessions have been more shallow than many previous ones and the job market has taken longer to recover. So let me leave no doubt as to where I stand. There are questions to be answered, to be sure. But changing demographics and other factors probably make the LFPR of the late 1990s something that will not be seen for some time.
Now Max and Tom might argue that, in the spirit of these comments, the conservative approach would be, for example, to ease up on the funds rate increases for now. They would find a lot of support for this among bloggers that I respect a lot -- Angry Bear, James Hamilton, and William Polley, to name just a few. Mark Thoma, on the other hand, emphasizes a different take on the cost-benefit analysis that works to the opposite conclusion. And so it goes.
Thanks for the mention. While I would welcome a pause in the rate hikes, the labor market is not my primary concern. However, it is on my radar screen. Given that the last recession was pretty shallow and payroll employment has been slower to recover than in previous expansions, I admit to being a little concerned about how far to push rates before letting the economy catch up. The macroeconomy deals with policy lags more slowly than the financial markets, after all.
But let me wholeheartedly agree with Max and Tom's plea to "look at the long-term trends." In not too many years the particulars of this business cycle will be a distant memory. The exact level at which the federal-funds rate "pauses" will be of little matter. I really suspect the same will be true of the federal deficit. What will matter is the set of policies that are put in place to maximize human capital development and unleash the seemingly boundless potential of the American people. With that in mind, your next stop should be this interview with James Heckman, who discusses the really big potatoes in thinking about how workers fare.
Yes. Read the Heckman article. Definitely.
It is true that the particulars of this cycle will be forgotten in a few years. What words to people use to describe the 1990s economically? Boom. Longest post-war expansion in history. Yes, even "bubble" comes to mind. But how soon we forget that in the fall of 1995, there was a bit of discontent in the air. GDP was still growing at a decent pace, but people were saying on the news how those statistics don't measure the way people really live. (As I was looking through some things today in preparing for classes next week, I found a page of notes that I took while watching Nightline back then.) Stories of mass layoffs still dominated the news.
And yet, Bill Clinton was re-elected one year later in a landslide. The economy of the 1990s was a sucess story and whether you think he had a little or a lot to do with it, Clinton got a lot of the credit. But my point is that in the fall of 1995, it wasn't a sure thing. As I have said repeatedly, that's about where we are now. It's not a sure thing. Layoffs still make headlines. GDP growth is stable and positive, but does the person on the street care? The parallels are there.
And to those who say that the media is spinning the economy to hurt the President because of a liberal bias, I respectfully disagree. As I said, I have notes on broadcasts and newspaper clippings to show that the media didn't give Clinton a free ride either. The media likes a story, and for the economy that means accentuate the negative--no matter who is in the White House. In 1995, I told my classes not to believe everything they heard. And now?
But I still hope the Fed pauses in December.
UPDATE: MaxSpeak blogs a postscript to the debate from Jared Bernstein.
Posted by William Polley at August 16, 2005 11:24 PM
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