I have not written as much about the economy as I once did because I was wrong so often back in 2008 to early 2011 about the threat of inflation.* The Federal Reserve was increasing the money supply, and inflation being a monetary issue, I worried about inflation. As you may have noticed, it didn’t happen. I was embarrassed, and so I decided to not talk about economics as much. (If economists followed that theory, there would be a lot fewer of them talking.)
In any case, I thought it might finally be time to make a couple of comments (or at least offer a few possibilities) about what is happening in the economy now. Obviously, the economy is growing. Whether it is growing as well as some would like, and whether everybody is participating in the growth, are separate questions. At least our economy is doing a lot better than, for example, Europe’s.
Also, unemployment is down. At least initially, part of that was a result of people who stopped looking for work and/or dropped out of the labor force. The unemployment rate is the number of people looking for work divided by the number of people in the labor force. If you are not looking for work, you are not considered unemployed. For example, if there are 93 people working and 7 people looking for work, the unemployment rate is 7 divided by the total of 93 + 7. That is 7%.
If one of those people gets a job the next month, the unemployment rate is 6 divided by the total of 94 + 6 – or 6%. However, you would get just about the same result if, instead of finding a job, one of those 7 people stopped looking for work That person would no longer be considered as “unemployed” or part of the labor force. Therefore, in that case, you would have 93 people working and 6 people looking for work. The unemployment rate, then, would be 6 divided by the total of 93 + 6 or 6.06%. More recently, however, much/most of the drop in unemployment has represented more people actually getting jobs.
Some people back in 2008 and 2009 said that what we had then was a financial crisis recession and that it takes longer to recover from recessions caused by financial crises than from recessions that are just part of the regular business cycle. If that is true, then what is happening now is the result of time passing, and the economy finally working the fiscal crisis through its system, instead of anything the federal government did.
However, a study published last month by economists at the National Bureau of Economic Research, “The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle?,” concludes that, in the last year, i.e., since January 1, 2014, the increase in employment, and drop in unemployment, was because of something the federal government did. Or rather, it was because of something the federal government did not do: It did not extend the extra unemployment benefits that the federal government had been financing since President Obama’s stimulus program in 2009.
Let me explain: The standard period of unemployment benefits is 26 weeks. During the recession, the federal government extended this period. It eventually got up to 99 weeks in some cases. Even though the recession technically ended a long time ago, the federal government kept some of those extensions in place. At the end of 2013, those extensions still lasted an average of 27 extra weeks, in addition to the standard 26 weeks. But when the President wouldn’t negotiate with the Republican House of Representation on reforms to the unemployment system at the end of 2013 (or vice versa, depending on how you look at it), all of the extensions ended. What happened?
Here is the synopsis of the NBER report:
“We measure the effect of unemployment benefit duration on employment. We exploit the variation induced by the decision of Congress in December 2013 not to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.”
I realize there is a lot of technical jargon here, but what the report is saying is that the decrease in unemployment benefits resulted in an increase in employment. In other words, in at least some cases – apparently many cases – if people couldn’t get unemployment benefits, they got jobs. The report concluded that the return of the maximum length of unemployment benefits to a standard 26 weeks resulted in 1.8 million additional jobs. And it is more than just that. Almost one million of those additional jobs were filled by workers who had dropped out of the work force but got back in because the extra unemployment benefits were not continued.**
I am sure there are economists who disagree with this report and/or who think the jobs would have been created anyway – or that the numbers are exaggerated. I am also sure there are some who think that not paying the extra unemployment benefits hurt the economy (which is what the White House Council of Economic Advisors predicted at the time). People, even economists, are not going to agree. Still it is an interesting idea that government may have helped the economy by what it didn’t do, instead of what it did.
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* Here are a few examples: March 6, 2008; July 26, 2009; November 16, 2010; and April 17, 2011.
** In other words, some of those people who had dropped out of the labor force earlier, thereby causing the unemployment rate to drop (see above), came back into the labor force and got jobs.
UPDATE (2/1/15 3:52 pm): Added a couple of links.
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