Radio commentary, October 9, 2009
Job market somewhat less miserable
In U.S. economic news, the slow improvement of the U.S. labor market continues, emphasis on “slow,” of course, and the baseline of general awfulness on which this improvement is founded. First-time applications for unemployment insurance fell by 33,000 last week to the lowest level since last November, just as the economy was beginning its fall from a cliff. The four-week moving average of initial claims, which is a better way of looking at these volatile figures, fell by 9,000, to its lowest level since last December. The fly in this particular jar of ointment is that over a half million Americans a week are still visiting the unemployment insurance office to sign up for benefits. While that’s down more than a hundred thousand a week from its peak last April, it’s still quite elevated—nearly twice as high as what we’d see in a strong labor market. And the count of those continuing to draw benefits is edging down, but more slowly, and it remains higher than the first-time series when they’re compared to their historical averages.
That suggests to me that, as I’ve been saying for a while, the pace of job loss is slowing, but the rate of hiring isn’t really picking up. And it’s not likely to any time soon. There’s an old rule of thumb in economics, called Okun’s Law (named after the Kennedy-era economist Arthur Okun), that says that you need about two points of GDP growth above a certain baseline level to get the unemployment rate down by a point. That baseline level is thought to be around 2.5%—so to get the unemployment rate down by a point over the next year, we’d need growth of 4.5%. That’s quite strong by historical standards—and we averaged just 2.7% during the 2001-2007 expansion, the weakest in modern history. Even in what was thought to be the boom of the 1990s we averaged just 3.6%. Since growth is typically quite weak for a long time after a major financial crisis, it’d be a stretch to expect anything like 4.5% growth in the next year or two. Even if we can get it up to 3.5%, it’d take a year or more to get the unemployment rate down to 9%. So we’re likely to see a persistently high level of joblessness even after the U.S. economy starts growing again.
One drag on growth is the constriction of credit. Despite trillions in government aid to the banks, they’re not lending—but then again a lot of people aren’t borrowing. We do have a long-term issue to worry about here: there’s too much debt throughout the economy, and we’ve become way too dependent on fresh extensions of credit to finance growth. With employment weak and wage growth in the doldrums, borrowing is about the only thing that can give consumer spending a kick, but neither borrowers nor lenders seem thrilled at that prospect. On Thursday, the Federal Reserve reported that consumer credit contractd at a 6% annual rate in August, the seventh consecutive month of negative numbers. There are few precedents for this in modern history, but it’s likely we’re going to see more of it as we all adjust to less borrowing. For an economy that’s been dependent on debt-supported consumption, and for a political system that’s dependent on high levels of consumption for legitimation, it’s going to be a challenge to make the transition.
Another challenge: a spreading panic in the financial markets about the U.S. dollar. The price of gold broke $1,000 recently, and has been setting new highs—a sign that investors are distrusting paper assets, especially the kind with pictures of dead presidents on them. This has several implications. One, the U.S. economy remains highly dependent on borrowing abroad. During the bubble years, the borrowing was for consumption and housing; now, it’s so the federal government can bail us out of the consequences of that bubble. It may well get harder and more expensive to do all that borrowing. And, two, if the aversion to the dollar gets strong enough, the greenback may lose its status as the world’s dominant currency, which would make it even harder and more expensive for us to borrow, and would probably make imported goods like oil more expensive. Countervailing that negative effect would be a positive one: U.S. exports would be rendered cheaper, and therefore more competitive, in international markets. But, in general, countries with depreciating currencies are in a state of long-term relative decline; devaluing your way to competitiveness can be the weakling’s strategy.
So far, though, worry about the international role of the dollar is affecting only the far right, which is using it as yet another stick to bash Obama (as if Republican administrations had nothing to do with getting us so deep into debt). The coastal elites seem less concerned. As Ken Rogoff, the IMF’s former chief economist who’s back teaching at Harvard, told the Financial Times, “The financial crisis probably has brought forward the day when the dollar is no longer dominant—but maybe from 75 years to 40 years.”
Whistling past the graveyard, is he? Or a voice of calm amidst anxious markets and excited political extremes? Answer next week.