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Suggested reading: Munger on Alesina, etl on Austerity

Over at EconLib.org, Michael Munger reviews Alesina et.al. Here's an excerpt:

"So, austerity is a second best policy, contingent on a particular kind of government failure. Alesina et al note that the effectiveness of austerity is controversial, with the discussion in the press “often taking a very ideological, harsh, and unproductive tone.” (page 3) The reasons given for why austerity should be selected by a government, or should be imposed as a condition of extension of loans by creditors, are obvious: (a) the ratio of debt to GDP has grown perilously large, raising questions about whether even the existing debt can be repaid, and (b) crises, fiscal needs arising from wars or major economic downturns in the business cycle or in currency exchange markets.

The critics claim that austerity is a moralistic, punitive policy designed to cause pain for excess deficits, one that fails even on its own logic because it actually pushes debt to GDP ratios higher rather than lower. The argument is that GDP shrinks sharply as government spending is cut, and even if debt falls, GDP falls by more which worsens the problem and causes an economic storm. 

In a way, that’s the end of the story. Because Alesina, et al. are able to give a decisive resolution to the controversy: not all austerities are the same. In fact, there are two very different types: a focus on raising taxes, and a focus on cutting spending. When it comes to imposing an austerity of “sharply increased taxes” variety, the anti-austerity activists probably have the best of it. But when the austerity takes the form of large-scale cuts, not just in budgets but in entire programs, the larger weight of evidence by far falls on the “austerity works” side of the scale."

Read the whole review here.  

Notes on the U.S. Employment Situation for March 2020: Unemployment rate 4.4%, Payrolls decline by 701,000

Frank Conte

OVERVIEW

• The unemployment rate rose to 4.4 percent in March with payrolls decreasing by 701,000 jobs, according to the Bureau of Labor Statistics. 
• The Labor Force Participation (LFP) declined to 62.7 percent. The Employment-Population ratio dropped to 60.0 percent reflecting a drop of 1.1. percentage points over the month. The number of unemployed persons rose by 1.4 million to 7.7 million.
• The increases in unemployment rates rose among all major worker groups.
• The most notable job losses hit food and drinking establishments with 417,000; the hospitality industry lost 29,000 jobs.
• Employment in health care and social assistance fell by 61,000 in March. 
• In March, the retail trade sector lost 46,000 jobs. However, general merchandise stores gained 10,000 jobs.
• In March, construction shed 29,000 jobs; the other services category saw a decline
• of 24,000 jobs. Mining lost 6,000 jobs in March and manufacturing lost 18,000 jobs.
• Employment in other major industries--including wholesale trade, transportation and warehousing, information, and financial activities--showed little change in March.
• Over the year, average hourly earnings have increased by 3.1 percent. In March, the average hourly private nonfarm wage rose by 11 cents to $28.62. The average workweek for all employees dropped by 0.2 of an hour to 34.2 hours.
• Revisions for the previous two months pushed the original estimates downward by 59,000. The payrolls report for January was revised down from +273,000 to +214,000 while the change for February was revised up by 2,000 from +273,0000 to +275,000. After these revisions, job gains have averaged 245,000 for January and February.

ANALYSIS

The key indicator in this month’s payrolls report is in the annotation from the Bureau of Labor Statistics. “March data from the establishment and household surveys broadly reflect some of the early effects of the COVID-19 pandemic on the labor market… It is important to keep in mind that the March survey reference periods for both surveys predated many coronavirus-related business and school closures in the second half of the month.”

That’s significant as the April and May numbers will continue to crater. The U.S. unemployment rate increased by 0.9 percentage point to 4.4 percent. This is the largest over-the-month increase in the rate since January 1975, according to the BLS.

Wall Street braced for fewer jobs losses, in a dramatic under-count; it expected a loss of 100,000 jobs. On Wednesday, ADP counted only a loss of 27,000 private jobs compared with the 713,000 private sector jobs lost, a variance that should keep statisticians busy. However, the number that will stick —more or less until next month’s payrolls revision— is a historic 701,000 jobs lost. Here too lies a variance. According to the household survey, the number of unemployed persons rose by 1.4 million. 

There is hardly a slither of good news in today’s survey — perhaps in the 11 cents per hour increase in average hourly wages. Or maybe in the addition of 10,000 jobs in the merchandise retail sector which provides no solace as that front-line work is now high-risk.

“Today’s numbers are shockingly bad and an understatement of the damage already done to the U.S. economy,” said Nick Bunker, economic research director at job search site Indeed. “If this is an indication of what was happening before the full force of the crisis hit, then it will be hard to come up with the words to describe the numbers in future months.” That scenario is a sure-thing. According to the Wall Street Journal, more than 6 million workers have thus far filed for unemployment. That was twice the number of those who filed two week earlier. (See Figure 1).

ZeroHedge summed it up grimly, “And now we brace for April, when the really ugly number will be revealed, and when according to some, the US economy may lose as many as 10 million jobs.” 

Not good.


What can we expect? All are betting on a recession given the onslaught of job losses. Restoring all the jobs lost is difficult to predict. But past recessions (See Figure 2) may or may not provide a guide. 

Figure 1.

Figure 2.

Source: Federal Reserve Bank, Employment (000s); National Bureau of Economic Research