Sunday, June 3, 2012

How do we pay for it?

Yesterday I posted a response to a Paul Krugman column that my sister had sent me. I agreed that the current emphasis on "austerity" was misguided, but wondered whether conventional stimulative policy would be as effective as our models suggest, because we're up against long-run energy constraints that weren't a major concern in earlier recessions. It's not that there isn't work that needs to be done to adapt to an energy-constrained future. Rather, our normal way of paying for these things is based on the premise of greater wealth in the future; if energy constraints make it hard for the economy to grow, then it's not clear how we do pay for the necessary work.

Between my sister and me, she's definitely the practical one, as shown by her immediately asking the sensible next question, "So how do we pay for it?" I don't know. That's a bone I've been worrying at for a few years now and I think I'm getting closer to an answer, though I don't quite have it. My closest approach so far has been in a presentation I made last month at a conference in Cooperstown on local energy. I'm getting the presentation "out" in the form of a series of blog posts, and I'm about halfway through; with any luck, I'll be able to finish them up in the next couple of weeks, but even once I do, my answer to my sister will probably still be, "I don't quite know ... quite yet."

My colleague Jason Antrosio pushed back harder than my sister. His first observation was that the "kinked supply curve" I described in my post could be less about geology and more about geopolitics--specifically, the removal of Iraq from the world oil market due to sanctions, then invasion, then civil war. His second point was that I sound awfully like a structuralist. I'll deal with that second concern first.

There are two common explanations for why the labor market has been in such bad shape since the recession took off in 2008. One school blames inadequate demand: people can't get jobs because households and firms aren't spending enough money to make firms want to hire people, and people aren't spending money because they don't have jobs. If the government would increase its spending (fixing bridges, building high-speed rail, (re)hiring teachers), then more people would have jobs, and they'd spend money, and firms would have more reason to hire people, and so more people would have jobs ... In other words, the classic "pump-priming" idea.

The other explanation is that the economy has "structural" problems. In this story, it's not that there's too little demand in general, it's that there's too little demand for certain kinds of work that got overextended during last decade's boom (construction and finance are too obvious candidates). If that's true, then what the economy needs is time--time for people to retrain from the professions that we had too much of, into ... other professions. And if that's what's needed, then increased government spending isn't particularly useful. In fact, it's harmful, because it'll just cause employment in the overextended sectors to get artificially pumped back up, blunting people's incentive to do the necessary work of getting into another sector.

So when I raise questions about whether standard demand stimulus can work, I can see how that sounds an awful lot like I'm a structuralist, but I certainly don't consider myself one.  First, there's the matter of the evidence. Krugman, and Mike Konczal, and myriad others have a very strong argument in the pattern of unemployment. If the problem were structural, rather than an overall lack of demand, then there would logically have to be plenty of demand in some part of the economy, or for some kind of employment. So there must be a sector of the economy or a kind of work where demand is strong and employment is rising. But there's simply no sign of that. Some sectors have been hurt worse than others, but there's no significant sector of the economy where employment is strong. It's hard to explain that in any way other than an overall lack of demand.

Second, there's the unprecedented long-term unemployment situation. The Bureau of Labor Statistics (BLS) tracks various measures of unemployment, including what's sometimes called the "headline" unemployment rate, their U-3 series. This number gets the most attention, and while it's been seriously bad during this recession, it's not stand-out bad. It peaked at 10% in October 2009, which didn't quite match the highs from the early 1980s, and since then it's made it's way unsteadily down to its May 2012 level of 8.2%. So it's really bad, but it's not unprecedented.

The long-run numbers are another story entirely. The BLS tracks the number of people unemployed more than 26 weeks. They also track the "labor force," defined as those people who have jobs, plus those people who are looking for work. If you take the long-term unemployed and divide it by the labor force, you get this picture:

Data from BLS, series LNS13008636, divided by series LNS11000000
 By this measure, the long-term unemployment problem peaked in early 2010, and while it's improving, it's still far worse than at any time since World War II--which is a polite way of saying "at any time since the Great Depression."

BLS also tracks the average and median duration of people's unemployment. The median data only pick up in July 1967 (the month I was born--Hmm, I wonder if there's anything to that ...), but if you graph the two of them, it looks like this:

Data from BLS, series LNS13008275 and LNS13008276
 The median, like the long-term rate shown above, peaks in early 2010 and then gets better, though its improvement hasn't been as pronounced. The average, on the other hand, perhaps peaked at the end of 2011, but has hardly come down since then. And with both of these series, the comparison to any other post-WWII experience is even bleaker than with the first chart. We've had other structural shifts since the war, but I haven't seen any structuralist explanation as to why this one is beating us up so much worse than any other.

(These charts are also a problem for those who want to blame the unemployment problem primarily on the unemployed. "They just need to get off their lazy asses and get a job!" So we're supposed to assume that the American worker in 2012 has by some mysterious process become twice as lazy as he/she had been at any other time since WWII. Right.)

Finally, I don't agree with the structuralist policy prescription. Structuralists assume there will be greater wealth in the future, as long as the government gets out of the way (except, of course, for taking actions to stroke the egos of the "job creators"). I assume nothing of the kind. I don't think that the main thing standing between us and a brighter tomorrow is high taxes, or regulation, or uncertainty about what crazy thing government might do next.

I think that what stands between us and a brighter tomorrow is an energy constraint, a constraint that, for various reasons, private markets aren't well suited to solve on their own. So government action, far from being useless, is crucial--the 2009 stimulus bill included funds for home energy retrofits, which some people mocked as obviously a crazy idea, but which look to me like some of the most sensible spending imaginable.

But precisely because of the energy constraint, paying for that government action is tricky. If structuralists assume there will be a brighter tomorrow as long as the government gets out of the way, standard Keynesians assume there will be a brighter tomorrow as long as the government "steps up to the plate." And Karl is unsure of brighter tomorrows in general.

Right now, the U.S. government can borrow at a negative real interest rate: people are so eager to lend Uncle Sam money, that the interest the government has to pay on its new loans is less than the rate of inflation. In normal times, any business would be thrilled to be able to borrow on those terms--if it couldn't turn a profit on a loan like that, it really has no business being in business. And in normal times, it would be a no-brainer for any government to seize the opportunity. Econometric studies routinely show that various infrastructure projects have large, positive effects on economic growth. So if you can borrow at negative interest rates and spend the money in ways that make the economy grow faster than otherwise, you can easily raise the money to pay back the loan without raising the tax rate--your richer economy will bring in the higher tax revenue all by itself.

But what happens if you borrow the money, spend it, and your economy doesn't grow, but merely shrinks more slowly than it otherwise would have?

Maybe borrowing the money is the right thing to do even in these abnormal times, as long as it's spent intelligently. As I said above, I haven't figured this out yet. But this post is already longer than I intended, and I haven't even gotten to Jason's point about Iraqi oil. I'll try to follow up on that soon.


  1. Hi Karl,
    Thank you for the extended answer. More than ever, sounds like the "How do we pay for it?" is a long-run question, and we know what Keynes said about the long-run.

    We can borrow at a negative interest rate; we can put people to work; and we can significantly re-tool our built environment for a future that consumes fewer resources. That is a brighter tomorrow, and it could shift the entire economic paradigm.

    This is a rare opportunity--talking about paradigm shifts rarely accomplishes anything, but here's a chance to really do it.

    Off the blogs and into policy advocacy for employment today and a brighter tomorrow (with appropriate low-energy use lighting, also appropriately shielded to avoid light pollution).


  2. A few factors could be added to this discussion. One is the unemployment effect of technological efficiencies that have made many jobs superfluous. This makes the current situation very different from the 30's. Do these changes also contribute to the shift of more wealth to the already wealthy? Another factor is the increased life expectancy; folks live much longer, but a smaller percentage of those years seem to be productive ones.
    Investing in infrastructure still seems like a no-brainer, but much more significant changes may be required "in the long run".

  3. Jason,

    Thank you for the repeated proddings on this. I think I'm coming off more gloomy in these posts than I mean to.

    Your second paragraph is exactly right (Say, have you ever considered the possibility of an exciting career in economics?). There's work to be done that will leave us better off than if we don't do it. And borrowing at negative interet rates is certainly a better deal than our government usually faces.

    Let's say we borrow a bunch, use it to hire people to remake our built environment, and then it turns out that, indeed, we've merely made ourselves less poor rather than making ourselves richer. How much trouble are we in? Probably not a lot--we can "merely" inflate away the debt. I put "merely" in quotation marks because its not a trivial action, but it could well be the least-bad one available under the circumstances, and if it were done right it could reasonably reallocate the sacrifice between generations (Uh-oh, I sense another post in the offing).

    So perhaps the post was mistitled. Rather than "How do we pay for it?", it should have been "Why aren't we paying for it?", the answer to which is our national political situation, by which I don't mean merely that we have a GOP whose first priority is regaining the White House. Even with comfortable majorities in both houses of Congress, I don't think Obama would be pushing for a big, green overhaul. The GOP is merely the most vocal in its opposition to anything that might have tree-hugger cooties on it; the political class at large seems unconvinced that the issue matters (perhaps the broader public is more open to it, but I don't know).

    1. Hi Karl,
      Thank you for this. "Why aren't we paying for it?" I like that a lot. As you note, our political situation is so opposed to what should be our priority--the big, green overhaul--that I don't want to say or write anything that would play into the anti-everything narrative.

      As related to our off-line conversation at the ice cream social (economists and anthropologists at ice-cream socials??), I'm trying to help you out with that enthusiastic-optimist thing for Econ 101.

  4. Bob,

    Thank you for pointing out those additional factors. I started to reply, but then realized it was turning into the length of a short post, so I wrote that instead.

    But while I’m here, a quick response to your question about increased concentration of wealth, that answer being, “Maybe” (which is my favorite word … or at least it may be).
    Increased efficiency can mean higher wages for the people who are still employed—after all, each of them is producing more than under the old technology, and so it’s possible for their employer to pay them more. But wages are determined by more than a worker’s productivity, and if labor’s bargaining position is being systematically weakened, then less of the productivity gain will end up as higher wages and more of it will take the form of increased profits.

    And that’s just the people who are still employed at the jobs where efficiency has increased. Some will have been let go, and they may well end up with a lower standard of living than they had before.

    Years ago I read Marty Weitzman’s book The Share Economy, in which he advocated paying workers a fixed share of revenues or profits, rather than a fixed wage. It’s been at least 15 years since I read it, so I can’t say much more about it, but something along those lines would move in the direction of seeing that the economy’s gains in productivity were more widely … shared.

  5. Invite you to look at for some different ideas.