« Bob Herbert and History. | Main | Barry Beelzebub. »
July 18, 2005
Krugman-Actually, Not Bad.
Krugman’s column today actually isn’t all that bad. He’s absolutely spot on, in fact, in his contention that something has changed in the US economy.
Some background: the unemployment rate is only one of several numbers economists use to assess the jobs picture. When the economy is generating an abundance of jobs, economists expect to see strong growth in the payrolls reported by employers and in the number of people who say they have jobs, together with a rise in the length of the average workweek. They also expect to see wage gains well in excess of inflation, as employers compete to attract workers.
In fact, we see none of these things. As Berkeley's J. Bradford DeLong writes on his influential economics blog, "We have four of five indicators telling us that the state of the job market is not that good and only one - the unemployment rate - reading green."
The DeLong post is here. I dropped a comment into a related thread which asks, to me, what is the interesting question. OK, we have obvious evidence here of a structural change in the US economy. If you were to ask someone like Richard Layard you’d get things like NAIRU has shifted (or the Phillips Curve, your choice). Very interesting. Now, what we need to do is go and ask why has it shifted and is that shift a good or a bad thing?
As Krugman points out, it may well actualy be a good thing:
There's both good news and bad news in that assessment. The good news is that the economy probably has plenty of room to expand before inflation becomes a problem (which implies that the Fed's decision to start raising interest rates was premature).
Until we work out the why we just won’t know will we, good thing or bad thing? Maybe it is just the Republithugs oppressing the workers. Maybe it is that the structural reforms of the 90s (welfare reform, for one) are actually wroking as advertised....in shifting NAIRU. As, again, Layard, one of their proponents, insisted they would.
July 18, 2005 in Economics | Permalink
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c2d3e53ef00d8348344c369e2
Listed below are links to weblogs that reference Krugman-Actually, Not Bad.:
Comments
Isn't the Phillips curve a flawed concept not conclusively validated by empirical studies?
Unemployment rates are also a function of labour market participation. You can actually get increasing unemployment rates with expanding demand for labour.
The unemployment rate can decrease if job-seekers decide to stop their active job search. Would be interesting to see what was happening in terms of flows of people from inactivity into activity.
Macroeconomics is not my thing, but maybe as the dollar depreciates, real incomes are diminishing which makes work less worthwhile.
Posted by: Angry Economist | Jul 18, 2005 1:41:52 PM
Similarly Brad Delong kept pointing out that with normal levels of immigration into the US they needed to create about 200 000 + jobs per month for the unemployment rate just to stand still. Maybe immigration has been reduced, perhaps by increased security measures?
Posted by: dave heasman | Jul 18, 2005 5:17:55 PM
Right on. Isn't this what the NYTimes had in mind when they signed him up? Why doesn't he do this more often?
Posted by: John Whitehead | Jul 18, 2005 6:52:22 PM
Hmmm..payrolls:
the surge in payroll tax revenues is an unprecedented upside surprise. Coming in $19.8 billion higher than forecasted when the FY2006 budget was first released last February, it's an upside surprise of 2.6%. The average surprise for the years 1994 to" 2005 has been only 0.5%"
http://www.poorandstupid.com/2005_07_10_chronArchive.asp#112135512857119481
From Luskin
Posted by: alene | Jul 18, 2005 8:54:31 PM
I thought the column was tedious in the extreme. Krugman points out that the current 5.0% unemployment rate is actually higher, but of course ignores that the 4.2% rate that Bush inherited was similarly higher.
It's almost enough to make me yearn for his columns on obesity!
Posted by: Brainster | Jul 18, 2005 10:54:08 PM
As to Fed tightening: seems to me that one of the best points to tighten is when you see asset inflation - 3 million dollar bungalows in California - and, two years out, a potential for some wage driven inflation. With luck a little air can be let out of the housing bubble and the rate of expansion in the overall economy will slow just a titch.
Plus you keep the folks buying US bonds which, sadly, is going to be an important consideration for several years to come.
(Oh, did I mention screwing the euro?? No; but that is merely a happy side effect.)
Posted by: Jay Currie | Jul 19, 2005 5:40:28 AM
Isn't the Phillips curve a flawed concept not conclusively validated by empirical studies?
Not really. A single, stable Phillips curve that could be used for policy was a bit of a pipe dream, but if you look at any forecasting model that is worth a lick, you will find something not unlike a Phillips curve relationship in it.
Or just look at the data. Get fifty years' worth of unemployment and inflation and do a scatterplot time series - what you will see will look uncommonly like a PC for the period 1955-72, another one for 1972-89 and a third one for 89-present.
Posted by: dsquared | Jul 19, 2005 1:57:59 PM
For those interested, one difficulty with the work of Layard and Nickell (see their magnum opus on unemployment) and with NAIRU models more generally, is that they have considerable trouble taking into account secular growth in real wages through rising productivity. Because in these models wage demands are a function of employment. The higher employment is, the higher the wage demands. In order to make wage demands compatible with what employers can actually afford there has to be some equilibrium unemployment. That's basically the logic. But - suppose productivity rises. Ceterus paribus, higher wages can then be afforded. So a NAIRU based purely on using unemployment as a device to moderate the level of absolute wage demands should drop over time as productivity grows. Explaining why it doesn't is a challenge.
Posted by: rjw | Jul 19, 2005 2:45:17 PM
