Worthwhile Reads – Link Round-up for August 20th

As people continue to search for better employment a new working paper from the National Bureau of Economic Research (NBER) (Paywall) finds that, despite claims from businesses, there is not a skills gap in the United States. FiveThirtyEight provides a quick summary of the paper and it’s importance in labor policy.

Ramesh Ponnuru takes on the chorus of people worrying about hyperinflation since 2011 if not before then. Stating that their belief that official number are skewed are a complete fallacy and stating that:

“If inflation were as high as these conservatives claim, then the economy would have to be shrinking fast. Williams is willing to bite that bullet: His site would have you believe that the economy has been continuously shrinking since 2005. But if that’s the case, then we also ought to see rapidly rising unemployment. Even he isn’t willing to go that far.”

Megan McArdle later adds to Ramesh’s argument by writing a good explanation on inflation and why food and energy are not used by the Fed in their measurements. She also emphasizes the need to select the correct statistics for the present problem, stating:

“As with unemployment, there are two different, and equally valid, questions we could be asking when we look at inflation statistics:

    • Are people finding it harder to maintain their standard of living?
    • Is monetary policy too tight or too loose?

These are actually very different questions, which doesn’t mean that one is more important than the other. The Fed is interested in whether there is too much money in the system, which would show up as a broad increase in all prices. That’s why it is probably more useful for them to look at “core” inflation, which excludes food and energy prices. Food and energy are very volatile because they’re vulnerable to supply shocks — a drought, a pig virus, unrest in the Middle East that might disrupt oil shipments. The Fed doesn’t cause those things, and it can’t fix them, either. If they use broader measures that include all this volatility, then a big oil shock would signal that it should raise interest rates — even though an oil shock is a recessionary force and probably calls for looser money to offset the economic contraction. The end result would be higher unemployment every time Iran gets frisky with its neighbors.”

Brad DeLong (and by extension Larry Summers) sees more work to be done to recover from the Great Recession (Brad calls it the Lesser Depression). They believe that hysteresis is occurring and that the unemployment numbers are not to be seen as a full recovery (see chart).

Hysteresis

Pascal Michaillat from the London School of Economics and Emmanuel Saez from UC Berkeley try to explain the cause of high unemployment during the last six years. Concluding that:

“Through the lens of our simple model, the empirical evidence suggests that price and real wage are somewhat rigid, and that unemployment fluctuations are mainly driven by aggregate demand shocks.”

Lack of aggregate demand causing high unemployment means that the response by our leaders was damaging and they knew it (the Federal Reserve called for more stimulus and after every recession since at least Reagan’s presidency has had government filling the demand by increasing spending). With Americans losing their equity in the housing crash they were pushed to saving and the government should have acted as spender of last resort to save the economy.

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