These two top economists of the new administration issue their guesses, we add our critique and that of Paul Krugman.
cites: Romer-Bernstein Report on Job Creation from the Obama Recovery and Reinvestment plan
http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf
To finish the thought on stimulus.
We talked about a few basics on stimulus, the multiplier and so on on Friday, but we didn’t get through to the end. And I failed to make the point that the stimulus will be overwhelmed by the economic contraction if the banking sector is not returned to some form of functionality.
Now Christina Romer and Jared Bernstein, the chief economists of the president and vice president respectively, have come out with a report on quote the job impact of the american recovery and reinvestment plan unquote, which is heavily focused on the multiplier and the impact of different stimulus measures.
So we’re going to spend the week, with the odd time out, looking at stimulus. We’ll begin today with an account of the report, and before we’re done, we’ll complete our thought on what affects the multiplier, return to idiot of the week with Wall Street Journal editorial page editor Paul Gigot, and offer a note from Jeffrey Sachs excerpted from this week’s Time magazine, entitled “The Case for Bigger Government,” and if we’re lucky recount the sins of Ben Bernanke and Henry Paulson.
This last is to emphasize that it doesn’t matter if Obama comes with the perfect government stimulus, unless he also comes with radical reform of the banking sector, it will be like blowing against the wind. He has spoken of unfreezing credit with part of the remainder of the TARP funds, along with housing assistance, but real radical reform that amounts to more than closing the barn door — the favorite reform of the current boys in power — needs to be enacted. It is our great good fortune to have the president we have, who understands at least as well as 90 percent of economists what has to be done and better than 99 percent of economists what the political realities are.
To review. Demand side economies operate on the strength of consumer demand, investment demand, and government demand. The consumer, as we’ve said, is dead. The best that can be hoped is that consumer demand can be stabilized. Investment that follows the consumer will necessarily also be tepid. Right now both are in free fall.
Government spending can come into the gap, but it needs a fully functioning financial sector to turn government demand into incomes into consumption into business investment. Otherwise the multiplier dynamic is short-circuited.
The Romer-Bernstein report came out on Saturday. Entitled “The Job Impact of the American Recovery and Reinvestment Plan,” the report is looking at the right metric — jobs, but it is hardly sophisticated. Its estimates of the multipliers are precise, but the foundations of those estimates are vague.
They are based on a quote consensus of a broad range of economists and professional forecasters.”
As if (a) this consensus has been right at any time during the past two years and (b) has even thought about multipliers previous to the past three months. The same broad range likely ascribed job creation to tax cuts in imitation of the supply side quackery that created our current combined budget fiasco and economic collapse.
Perhaps less Demand Side pique is appropriate. Just notice as we go through that these assumptions are static, as if every dollar of this spending produces that multiplier no matter what the situation in the economy. The cite for the report is up first on the transcript.
Romer and Bernstein use the rule of thumb that a one percent increase in GDP corresponds to 1 million jobs (or three-quarters percent employment growth). They caution that the likely scale of employment loss is large, potentially totalling 5 million and predict that without a plan the unemployment rate would top out at 8.8 percent, while with the plan, we will still see 7.0 percent. Well, we have 7.2 percent already.
Demand Side made the call on Friday that ten percent unemployment is baked into the current dynamics — if you can call a frozen economy dynamic.
Romer-Bernstein suggest that the Obama plan — we should stop here and make clear that there is no take it or leave it Obama plan; this report analyzes a generic approximation that will no doubt change — the Obama plan will produce or save between 3.3 and 4.1 million jobs.
The largest percent declines in employment over the past year by sector have been in construction and manufacturing. Now quoting from the report, page eight:
While estimating the effects at the industry level is even more difficult than estimating aggregate effects, there are well-established cyclical differences across industries that underlie the qualitative results of this analysis. For example, the largest percentage declines in employment over the past year have been in construction and manufacturing.
The estimates suggest that 30% of the jobs created will be in construction and manufacturing, even though these industries employ only 15% of all workers.
Both sectors have been particularly hard hit recently. The other two significant sectors that are disproportionately represented in job creation are retail trade and leisure and hospitality (mining is also represented disproportionately, but employs less than 1% of all workers). Construction, manufacturing, retail trade, and leisure and hospitality all employ large numbers of low- and middle-income workers whose incomes have stagnated in recent decades and who have suffered greatly in the current recession.
The kinds of jobs are described as follows:
The recovery plan is likely to create jobs paying a range of wages. Significant shares of jobs are created in sectors that pay above average, such as construction and business services, as well as sectors that pay below average, such as retail trade and leisure/hospitality (hotels, restaurants).
Union representation is higher than average in some of the sectors in which the recovery package creates significant numbers of jobs. Union coverage in construction and manufacturing, which account for almost one-third of the jobs created by the package, are 14% and 11%, respectively, compared to 7.5% coverage for the private sector overall.
Along the same lines, recent research by Robert Pollin and Jeannette Wicks-Lim (available at http://www.peri.umass.edu/green_jobs) suggests that investments in green energy will create jobs that generally pay well above the typical wage. For example, compared to the national median wage of $15 in 2007, some of the jobs created by these investments include: electricians (median wage, $21.50/hour), carpenters ($18/hour), operations managers ($43/hour), and production supervisors ($23/hour). The occupation-weighted average wage in green energy jobs is about 20% above the national average.
Finally, in addition to creating high-quality jobs, the program is likely to improve existing jobs. One important way that it will do this is by moving workers from part-time to full-time work. Over the past year, as the overall unemployment rate has risen by 2.3 percentage points, the number of workers working part-time for economic reasons has risen by 3.4 million. This is a main reason why the underemployment rate rose to 13.5% in December compared to 8.7% a year earlier.
We estimate that our program will cause the unemployment rate to be about 1.8 points lower in 2010-Q4 than it otherwise would have been. If the same relationship between movements in overall unemployment and movements in workers working part-time for economic reasons holds for the effects of the recovery package, the program will allow about 1.8/2.3 times 3.4 million, or 2.7 million, workers to move from part time to full time. It will reduce the underemployment rate by more than three percentage points compared to its level in the absence of the recovery package.
Let’s turn to Paul Krugman’s critique here, before we conclude with ours.
More on Romer/Bernstein: Still picking over the Romer/Bernstein official evaluation of the Obama economic plan. Again, kudos to the team for producing such a clear, honest assessment. But the more I look at the report, the more I wonder why anyone in the Obama team thinks the plan is adequate.
Here’s one way to look at it: R/B show the effects of the plan rapidly fading out during 2011. Yet at the end of 2011 the unemployment rate is still 6.3%. Meanwhile, the CBO estimates the natural rate, aka “full employment,” at just 4.8%. Why does the plan go away with the job undone?
Add: By my calculations, the Obama plan is supposed to reduce average unemployment over the next two years from 8.7% to 7.6%; over the next three years, it reduces average unemployment from 8.4% to 7.3%. So it closes around a third of the gap between actual unemployment and the natural rate. Plus, an average rate of unemployment 2.5 percentage points above the natural rate for 3 years, starting with a core inflation rate of 2.5, looks like deflation city to me — and remember, that’s the projection with the Obama plan.
Paul Krugman
We wince whenever we hear mention of the natural rate of unemployment, an Alan Greenspan favorite that has little empirical evidence in its portfolio and is mostly an assumption derived from the assumption that spawns the notorious Phillips curve.
Our Demand Side critique is based on another false precision, that of the multiplier. There are some algebraic certainties. If all income were saved or spent in the current period, the multiplier would be the inverse of the consumption function.
This means a savings rate of five percent would generate a multiplier of twenty, light years above the top Romer/Bernstein multiplier of 1.57. That is, 95 percent of income is spent. The multiplier is the inverse of this consumption function. The inverse of point nine-five is twenty.
Therefore not all income that is spent is spent on current consumption. Well, duh. There’s a big bunch at mortgages and credit. Another part could be spent on imports.
Posted in Uncategorized by demandside on January 18th, 2009 
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