Unemployment

In an important new report, CEPR's John Schmitt and Dean Baker detail the likely impacts of a recession on unemployment and poverty:

A recession that is mild-to-moderate by recent historical standards would be formally over in six to nine months (as was the case of the early 1990s and early 2000s downturns); a recession that is severe by recent historical standards would last about two years (the total number of months in recession during the 1980-82 "double-dip" downturn). Based on the experience of the last three recessions, however, the labor-market recession would last between three years (the length of the labor-market recession in the early 1990s and early 2000s recessions) and four years (the length of the labor-market recession in the severe recession of the early 1980s).

If the next recession follows the pattern set by the three most recent downturns, a recession in 2008 would raise the national unemployment rate by between 2.1 (a mild-to-moderate recession) and 3.8 percentage points (a severe recession along the lines of the early 1980s), increasing the number of unemployed Americans by between 3.2 million and 5.8 million. Based on the historical pattern, the unemployment rate and the number of unemployed would continue to increase through 2010 (to 6.7 percent in the case of a mild-to-moderate recession) or 2011 (to 8.4 percent in the case of a more severe economic downturn).

Critics of new spending on public infrastructure as part of an anti-recession plan have argued that it isn't timely enough to have a "stimulative" effect on the economy. Whether or not that is the case, the Schmitt/Baker report is an important reminder that anti-recession policies need to be about more than putting money into consumers' hands over the next three months; the effects of even mild recessions are long-lasting, and short-term thinking and policies by themselves aren't adequate to address them.

PS: The NYT Editorial Board's Blog has a nice post summarizing the CEPR paper.

Better late than never, I guess:

President Bush, in a marked shift from his usual upbeat economic assessments, conceded here on Monday that the nation faces “economic challenges” due to rising oil prices, the home mortgage crisis and a weakening job market.

“We cannot take growth for granted,” Mr. Bush said in a speech to a group of business leaders in which he acknowledged that “recent economic indicators have become increasingly mixed.”

But even after a government report on Friday that showed unemployment jumped to 5 percent last month from 4.7 percent in November, Mr. Bush stopped short of warning that the nation may be about to enter a recession.

Fiscal stimulus is shaping up to be the issue of 2008. Conservative fiscal stimulus has amounted to little more than providing the wealthy with additional tax preferences. Populist fiscal stimulus should aim not just at helping the economy by helping all Americans, but also at taking a first step toward broader programmatic reforms. In a recent TPM post, Dean Baker has exactly the right idea:

There are many ways to make a stimulus package at least partly green. For example, we can have generous tax credits for people to install more insulation in their homes, solar panels or other improvements that will reduce energy use. This would be an effective way to reemploy many of the construction workers who are losing their jobs. The credit should be time-limited (e.g. 18 months) so that people have an incentive to act soon.

We can also give people money and a powerful incentive to use mass transit by giving transit agencies money to reduce fares. If we gave public transit agencies enough money to reduce transit fares by $1 a trip, over the course of a year this would provide the same stimulus as giving a $500 tax rebate to every user of public transit.

We can also use the stimulus package to jump start pay by the mile auto insurance. While many enviros are obsessed with hybrids and hydrogen powered cars, the quickest way to reduce greenhouse gas emissions in the auto sector is to give people incentive to drive less. This can most effectively be done by shifting from the current insurance system, in which drivers largely pay the same rate regardless of how many miles they drive, to a system in which they get charged for each mile they drive. This would have no effect of the average cost of insurance to drivers, but it would provide as much disincentive to drive as a $1.50 a gallon gas tax.

A stimulus package could jump start pay by the mile auto insurance by giving out a large rebate, in the range of $400 per driver, for pay by the mile insurance policies. This would provide the same stimulus as a $400 tax credit for every person who ends up taking out a pay by the mile policy. Of course, this one may take a bit longer to implement than some other green measures, but the good news is that the housing crash recession is likely to be long, so we will probably still be needing stimulus a year or two down the road.

While we can debate the specifics, the basic point is simple. Since the point of an economic stimulus is to throw money at people, we might as well throw money at people for doing something green.

Turns out that Dennis Kucinich might not be that far off when he says "joblessness is a weapon of mass destruction. In a new NBER working paper, Daniel Sullivan and Till von Wachter find that mass-layoff-caused "job displacement leads to a 15-20% increase in death rates during the following 20 years."

If such increases were sustained beyond this period, they would imply a loss in life expectancy of about 1.5 years for a worker displaced at age 40. These results are robust to extensive controls for sorting and selection, and are consistent with estimates of the effects of job loss on mortality pooling displaced workers and stayers that are not affected by selective job displacement. To examine the channels through which mass layoffs raise mortality, we exploit the panel nature of our data -- covering over 15 years of earnings -- to analyze the correlation of long-run career outcomes, such as the mean and standard deviation of earnings, with mortality at the individual and group level, something not possible with typical data sets. Our findings suggest that factors correlated with a decrease in mean earnings and a rise in standard deviation of earnings have the potential to explain an important fraction of the effect of a job displacement on mortality.

According to conservative economic theory, Sweden, with a top marginal income tax rate of around 57 percent and public spending on social programs almost double that of the United States as a percentage of GDP, should be an economic basket case. As any sensible person and all centrist pundits know, evidence that this theory is correct includes the sky-high unemployment rate in Sweden.

Except it's not, as CEPR's John Schmitt shows in an excellent new report:

... the U.S. unemployment rate would be 13 percent using a methodology frequently cited in critiques of Sweden’s “real” unemployment rate. The McKinsey Global Institute's calculations of Sweden’s "de-facto" unemployment rate as 17 percent — more than three times the official rate (2004) — has been cited in news publications such as the Financial Times and The Economist.

Using McKinsey’s approach and unofficial definitions of the “unemployed,” CEPR’s report calculated that the U.S. unemployment rate for the same year would be 13.8 percent (more than double the official rate of 5.5 percent). If the U.S. prison and jail populations are also included, something that McKinsey did not do in their original study of Sweden, the U.S. unemployment rate would rise to 15.2 percent.

A better approach for making international unemployment comparisons is to use the OECD's standardized unemployment rates. For the first quarter of 2007, the OECD measure puts the U.S. unemployment rate at 4.5 percent and Sweden’s at 6.7 percent.

One of the more notable figures in the report is a comparison of the number of potential workers in each country who are not working because they're in prison or jail. In Sweden, only .2 percent of the labor force is in jail or prison; in the United States it's 1.4 percent, some 2.136 million potential workers. The official OECD unemployment rates exclude these potential workers, if they're added in, the difference between unemployment in the two countries narrows to only one percentage point.