Obama’s Speech, Labor Markets, and the Old Normal

David Rosenberg in his morning email, makes a great point:
Employment conditions in the U.S. still sluggish: one has to wonder why the White House wants to boost capital spending when it is the labour market that is in need of the most help right now
It’s positive that the President is pushing for more stimulus (it’s also vindication for departed CEA chief Christina Romer, as we’re finally getting closer to a level of federal expenditures (including tax breaks) that is sufficient to deal with a downturn as large as the recent one).  And immediate capital expensing is a good way to stimulate business investment. 
 
However, it’s likely that some or all of that marginal investment is pulled forward from the future.  The home buyers tax credit and cash for clunkers incentives seemed to have similar effects (yes, Ricardian Equivalence can and does happen; that doesn’t mean it’s inevitable any time the federal government runs a budget deficit).  And individual businesses aren’t going to invest if, relative to expected demand, they already have spare capacity. 
The basic problem is that households are trying to save (pay down debt) at the same time that unemployment is rising and overall incomes are treading water.  Rosie’s right – policymakers’ attention would be better focused on the labor market than business investment.
 
In another email today that’s relevant to Rosie’s point, economist Austan Goolsbee (now ranking member?) of the CEA wrote:
Millions of our friends and neighbors around the country are looking for work, wondering how they will pay this month’s rent or put food on the table for their families.  At a speech in Wisconsin on Monday, the President made clear that turning our economy around is his top priority:
 
I am going to keep fighting every single day, every single hour, every single minute, to turn this economy around and put people back to work and renew the American Dream, not just for your family, not just for all our families, but for future generations.
 
At 2:10 p.m. EDT today, President Obama will announce a set of targeted proposals to help our economy continue on a path to recovery during a speech in Cleveland, Ohio.  I know many of you have questions about what this Administration is doing to support working families and small businesses who are struggling to get by.  So immediately following the President’s remarks, I’ll be hosting a live chat to answer your questions about what we’re doing to help Americans find jobs and to rebuild our economy for the long term.

In about ten minutes, we’ll hear what those “targeted proposals” are.  But based on the trial balloons to date, it seems unlikely that the President will announce anything today that (1) will have an immediate impact on anything other than expectations (and he risks clouding expectations, if his speech creates even more uncertainty about the future trajectory of tax policy) and (2) can be enacted without Congress (which in the midst of an election and then the end of a session — possibly with the GOP in control of the House again –might not be able to accomplish much of anything in 2010).  And the Administration’s rhetoric is still laced with counter productive promises like, ‘without worsening the deficit’.

If President Obama wants to do something powerful for his “friends and neighbors around the country,” he should enact something like Warren Mosler’s idea for an immediate year long payroll tax holiday.  It might even be possible to do it under the auspices of Treasury, without having to wait for Congressional approval.  It would have a positive and immediate economic impact, and might even take the edge of the drubbing his party is expected to receive in November.  If Obama refuses to pick it up, then the GOP should in the next Congressional session; see David Frum’s recent advocacy of this measure.

One other interesting point in Rosie’s email: 

Statistics, damned statistics and lies: what we are currently seeing in the U.S. economy is not normal given all the fiscal and monetary stimulus that it has received

He’s right, it’s not normal.  Or is it?  As we’ve pointed out previously, it could be that what we’ve all become accustomed to as “normal” in the past sixty years was anything but, given that so many of those trends were driven by the profoundly abnormal presence of a demographic cohort like the baby boom, and tailwinds like global financial and trade reintegration. 

In fact, it could be that PIMCO’s “new normal” is a return to a true normal.  If so, we need to reconsider many of our assumptions about economic growth and financial market performance in developed nations.

categories News and Views | September 8, 2010