Friday, June 1, 2012

Jobs Report? What Jobs Report?

Woooo, that jobs report is a doozy. Via Matt Yglesias:
"The latest jobs report is a total disaster. We got 69,000 new jobs in May which is well below already tepid expectations and is below the labor force trend growth rate. Terrible.
But it gets worse!
The change in total nonfarm payroll employment for March was revised from +154,000 to +143,000, and the change for April was revised from +115,000 to +77,000.” In other words, we gained 69,000 new jobs in May (estimated) but lost 49,000 in revisions. That leaves us with a net increase in employment of just 20,000. Disaster disaster disaster. 
The further internals are not very interesting. Just about everything except health care was flat, as part of the overall flatness. One exception was construction which fell despite some recent good housing news. That’s because we had substantial drops in “heavy and civil engineering construction” and also in “specialty trade contracts” which looks to me like the fracking boom slowing down. Even more fail as “average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour.” That’s not terrible news on its own, but it further darkens and already bleak picture.
A lot of this is already getting fed through an election year politics lens, but it's important to remember that this is first and foremost a human tragedy for unemployed and underemployed people, and for employed workers who've been stripped of bargaining power due to persistent labor market weakness. If growth stays dismal and Barack Obama loses the election, he and Michelle and Jack Lew and Tim Geithner and all the rest will go on to have happy, healthy, prosperous lives. Other people's careers are much more in the balance. And the responsibility for addressing this crisis lies first and foremost with the Federal Reserve Board of Governors, the one institution in the U.S. government specifically charged with focusing on macroeconomic stabilization. For months now they've been dawdling instead of rolling up their sleeves and thinking as hard as they can about what to do to increase demand and employment."
Matt pretty much covers all of what I wanted to, but I still want to expand upon what he said about the Fed Board. He's dead-on that they've been dragging their feet for no good reason. Inflation isn't a major concern right now--in fact, we could use a few percentage points more. I know, I know, super taboo. Ideally, we'd take a leaf out of Scott Sumner's book and give Nominal GDP targeting a try. Not a whole lot of time to explain what that is for those of you who don't know, so I'll provide an excerpt from Christina Romer since this is the most concise (and non-wonkish) explanation of NGDP targeting I've been able to dig up:
"Nominal G.D.P. is just a technical term for the dollar value of everything we produce. It is total output (real G.D.P.) times the current prices we pay. Adopting this target would mean that the Fed is making a commitment to keep nominal G.D.P. on a sensible path.
More specifically, normal output growth for our economy is about 2 1/2 percent a year, and the Fed believes that 2 percent inflation is appropriate. So a reasonable target for nominal G.D.P. growth is around 4 1/2 percent.
It would work like this: The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.  
HOW would this help to heal the economy? Like the Volcker money target, it would be a powerful communication tool. By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth.  
Such expectations could increase spending and growth today: Consumers who are more certain that they’ll have a job next year would be less hesitant to spend, and companies that believe sales will be rising would be more likely to invest.
Another possible effect is a temporary climb in inflation expectations. Ordinarily, this would be undesirable. But in the current situation, where nominal interest rates are constrained because they can’t go below zero, a small increase in expected inflation could be helpful. It would lower real borrowing costs, and encourage spending on big-ticket items like cars, homes and business equipment. 
Even if we went through a time of slightly elevated inflation, the Fed shouldn’t lose credibility as a guardian of price stability. That’s because once the economy returned to the target path, Fed policy — a commitment to ensuring nominal G.D.P. growth of 4 1/2 percent — would restrain inflation. Assuming normal real growth, the implied inflation target would be 2 percent — just what it is today. 
I think what I like most about NGDP targeting is that it hits both unemployment and inflation in one metric. Or maybe its the fact that it looks like it gets rid of the problem of the zero lower bound we currently face with interest rate targeting. I'm semi-new to the whole idea, but from what I've read, I really like it. I'll definitely be following it closely from now on. 

Anyways, I know I don't post much about monetary policy, but I think its pretty clear that the Fed has failed in its unemployment mandate. Perhaps you could argue that part of the reason for Fed inaction is political pressure from inflation hawks like Ron Paul. But the point of central bank independence is that it's not supposed to cave to political pressure. So what're they waiting for? 




PS. Sorry I couldn't get more technical in this post, finals week is upon us. Limited posting ahead.