Kevin Drum - January 2011

Jobless Recoveries, Take Two

| Mon Jan. 17, 2011 6:07 PM EST

Why did unemployment spike so sharply and recover so much more slowly than GDP during the current economic recovery (as well as every other recovery of the past 30 years)? I suggested this morning that part of the reason had to do with the demise of union contracts in particular and the more general social contract that followed from them: to some extent, firms in the past didn't immediately fire workers during a downturn simply because they were expected not to. Today that social contract is dead. Paul Krugman adds another guess:

The key point for productivity here may be that engineering a recovery from postmodern recessions is much harder than engineering a recovery from a recession more or less deliberately inflicted by the Fed; and as a result the recoveries tend to be long flat U’s rather than the V-shaped recoveries of yore. And to the extent that firms know this, they have less reason to hoard labor; they’re not going to need those laid-off workers for a long time.

Nick Rowe adds another point: perhaps our current recovery featured outsized unemployment because it was so concentrated in the construction sector. Unlike some industries, where you want to hold onto workers because their skills might be hard to find when the economy bounces back, construction skills are easy to find:

There's general human capital, which is useful at many firms, and firm-specific human capital, which is only useful at one firm. If your workers have firm-specific human capital, and you lose them, and need to hire new workers when demand returns, it will be costly to train the new workers for the particular skills they will need in your firm. So you won't want to lose your existing workers, and you will keep them on the payroll even if you don't need them right now.

But if your workers have general human capital, it doesn't matter if you lose them. You can lay off all your bricklayers in a recession, and just hire new bricklayers when demand returns. My guess is that the construction trades require a lot of general human capital and very little firm-specific human capital. Two building sites can swap bricklayers easily, with minimal re-training. "Welcome to your new job. The Porta-Potty is over there. Start laying bricks here". Am I right?

Let's combine these two observations. In the postwar period, I don't think it's quite right to say that recessions were deliberately inflicted by the Fed. Rather, they were largely inflicted by the automatic operation of Regulation Q, which imposed caps on the interest rate that banks and S&Ls could pay on deposits. When economic expansions got a little too robust, and inflationary pressures pushed market rates on treasury bills and corporate debt above Regulation Q ceilings, depositors would withdraw their funds from banks and invest them elsewhere. This loss of deposits caused an immediate shutdown in the mortgage market, which in turn caused an immediate turndown in the construction market. This cooled down the economy, and eventually market rates declined and money flowed back into banks. Next stop: recovery.

In other words, we have plenty of experience of recessions caused by a turndown in the construction market. For over 20 years, this was the primary lever by which the economy was managed, and it didn't cause long, jobless recoveries. It's true that the construction industry and organized labor didn't much care for this system, but they accepted it anyway because it so patently worked well as a countercyclical economic tool. (It's long gone, of course. Regulation Q disappeared in the 70s, a victim of inflation and financial market deregulation.)

So what's the difference between then and now? The construction sector is crucial to both eras, but the difference is that Regulation Q was so effective: it shut down the credit market at the first sign of irrational exuberance, but it also eased up at the first sign of recession. Everyone knew this, which I imagine gave firms a certain amount of confidence that postwar downturns would be sharp but short.

Our current downturn offers no similar assurance. The credit market got far, far out of hand before the 2008 crisis cut it off at its knees, and there's no longer anyone or anything that can wave a magic wand and bring the construction industry back to life. And once again, everyone knows this. Back in 2008 there was no reason to think that the construction industry was going to recover soon, and no reason to think it would fuel a more general recovery even if it did. So firms hunkered down for a long downturn and laid off as many workers as they could.

All of which is a long way of saying that I'm not sure construction holds the key to anything this time around. There was a huge collapse of credit throughout the economy in 2008, and every sector is now engaged in a long, slow process of deleveraging. Given the uncertainty surrounding this mechanism of recovery, it strikes me as unsurprising that firms are reluctant to rehire.

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Quote of the Day: The Fourth Amendment Blues

| Mon Jan. 17, 2011 3:17 PM EST

From a Florida state appellate court, after reviewing a case in which police officers claimed that a search of a defendent's apartment in a drug case was legal because he invited them in and then cheerfully volunteered the location of his hidden stash:

The judge may have punctiliously performed the duties of his office in this case, but, when considering the large number of “consent” cases that have come before us, the finding of “consent” in so many curious circumstances is a cause for concern.

Indeed. Click the link for more. This is such an obvious case of police perjury that a Hollywood screenwriter would probably turn it down as a little too contemptuous of Southern law enforcement. Despite that, the appellate judge had no choice but to let the search stand. Lovely.

Portugal's Experiment With Drugs

| Mon Jan. 17, 2011 2:03 PM EST

Glenn Greenwald wrote a report for Cato a couple of years ago that gave high marks to Portugal's experiment with drug decriminalization, and now a study in the British Journal of Criminology largely gives it high marks too:

Faced with both a public health crisis and a public relations disaster, Portugal’s elected officials took a bold step. They decided to decriminalize the possession of all illicit drugs — from marijuana to heroin — but continue to impose criminal sanctions on distribution and trafficking....As the sweeping reforms went into effect nine years ago, some in Portugal prepared themselves for the worst. They worried that the country would become a junkie nirvana, that many neighborhoods would soon resemble Casal Ventoso, and that tourists would come to Portugal for one reason only: to get high. “We promise sun, beaches, and any drug you like,” complained one fearful politician at the time.

But nearly a decade later, there’s evidence that Portugal’s great drug experiment not only didn’t blow up in its face; it may have actually worked. More addicts are in treatment. Drug use among youths has declined in recent years. Life in Casal Ventoso, Lisbon’s troubled neighborhood, has improved. And new research, published in the British Journal of Criminology, documents just how much things have changed in Portugal. Coauthors Caitlin Elizabeth Hughes and Alex Stevens report a 63 percent increase in the number of Portuguese drug users in treatment and, shortly after the reforms took hold, a 499 percent increase in the amount of drugs seized — indications, the authors argue, that police officers, freed up from focusing on small-time possession, have been able to target big-time traffickers while drug addicts, no longer in danger of going to prison, have been able to get the help they need.

But there's also this:

The numbers aren’t all positive. According to the latest report by the European Monitoring Center for Drugs and Drug Addiction, the number of Portuguese aged 15 to 64 who have ever tried illegal drugs has climbed from 7.8 percent in 2001 to 12 percent in 2007....Heroin use jumped from 0.7 to 1.1 percent, and cocaine use nearly doubled — from 0.9 to 1.9 percent. In other words, said Keith Humphreys, a professor of psychiatry at Stanford University, the changes in Portugal have had a somewhat expected outcome: More people are trying drugs.

....Hughes [] takes issue with Humphreys’s argument that drug use, in general, is increasing at a dramatic clip. What’s most relevant, she said, is not the percentage of people reporting using drugs at some point over some course of their lifetime, but the percentage of people reporting using drugs in the past year. “That’s going to be affecting the government and communities now,” she said. And here, the increase of Portuguese reporting illicit drug use is much smaller — up from 3.4 percent in 2001 to 3.7 in 2007.

Overall, then, this data suggests that decriminalization has produced more experimentation but not a lot more long-term drug use. If, say, an extra 0.7% of the population experiments with drugs because of the laxer laws, but nearly all of them give it up after a short time, that would produce over six years an extra 4.2% of the population that's "ever" tried illegal drugs. Thus a lifetime use rate that goes up from 7.8% to 12%. On the other hand, if most of them give it up after a brief fling, that doesn't mean that actual usage rates have increased much. (But on the third hand, a small increase in the entire population might represent a fairly substantial increase among 17-21 year-olds. We'd need to see the entire data set to know for sure.)

In any case, Portugal is a great test bed. One of the big questions in drug policy is just how elastic the demand for illegal drugs is. It makes sense that if you lower the price of marijuana or cocaine, use will go up, and that lowered price can be in the form of either actual dollars or reduced risk of being fined or arrested. But as always, the question is: how much? If decriminalization increases drug use by a few percent, that's not bad — especially considering the massive downsides of the war on drugs. But if it doubles or triples drug use, the consequences are more severe. The more data we have on this, the better.

The Pom Pom Vote

| Mon Jan. 17, 2011 12:32 PM EST

The LA Times reports today that Los Angeles city councilman Jose Huizar recently directed his staff to prepare lists that graded civic leaders numerically on their level of support for him:

The lists include politicians, school principals, church pastors, museum officials, high school cheer squad advisors, police officers and even presidents of local American Legion posts.

High school cheer squad advisors?

Why We Have Jobless Recoveries

| Mon Jan. 17, 2011 12:10 PM EST

Alex Tabarrok noodles on the difference between postwar recessions and modern recessions:

Firms used to engage in labor hoarding during a recession and now firms are labor disgorging [i.e., firms used to hold onto workers during a recession, but now they fire them at the first sign of a slowdown]. As a result, labor productivity has changed from being mildly pro-cyclical to counter-cyclical. Why? I can think of four reasons. 1) The recession is structural, as Tyler has argued. If firms don't expect to ever hire workers back then they will fire them now. 2) Firms expect the recession to be long — this is consistent with a Scott Sumner AD view among others. 3) In a balance-sheet recession firms are desperate to reduce debt and they can't borrow to labor hoard. 4) Labor markets have become more competitive. Firms used to be monopsonists and so they would hold on to workers longer since W<MRP. Now that cushion is gone and firms fire more readily. What other predictions would this model make?

All of these things may be true, but I'd offer one further explanation: in the past, holding onto workers through a recession was simply part of the social contract. Economically, it didn't make any more sense in 1955 than it does today, but firms did it anyway because it was expected of them. In union-dominated industries, contracts demanded this kind of behavior. In non-union industries, corporations did it as a way of keeping unions at bay (since unions had a much easier time organizing industries that provided lousy benefits). And white collar industries didn't feel that it was right to treat their workers worse than blue collar workers were treated. All of this conspired to create a social custom that bound workers and firms together.

This all evaporated in the 80s, of course, as younger workers largely got tired of dedicating themselves to a single company for life and corporations didn't feel like they could compete with rivals who were more ruthless about downsizing. As a result, workers are now fired much more quickly during downturns and hired back more slowly during recoveries. It's no coincidence that we first saw this pattern following the 1991 recession. It's just one more example of economic behavior which is, technocratically speaking, more efficient, but in which the benefits of that efficiency flow pretty much entirely in only one direction.

WikiLeaks Strikes Again

| Mon Jan. 17, 2011 11:35 AM EST

It looks like Bank of America is about to have company:

A former Swiss bank executive said on Monday that he had given the WikiLeaks founder, Julian Assange, details of more than 2,000 prominent individuals and companies that he contends engaged in tax evasion and other possible criminal activity.

Rudolf M. Elmer, the former head of the Cayman Islands office of the prominent Swiss bank Julius Baer...told the Observer newspaper over the weekend that those named in the documents come from “the U.S., Britain, Germany, Austria and Asia — from all over,” and include “business people, politicians, people who have made their living in the arts and multinational conglomerates — from both sides of the Atlantic.”

It's going to be a while before we see any of this stuff, though. WikiLeaks is apparently so bogged down with its current activities that it has no idea when this stuff will be made public.

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Liberals and Labor

| Sun Jan. 16, 2011 12:46 PM EST

Freddie deBoer points out (correctly) that the liberal blogosphere lacks a serious left wing:

No, the nominal left of the blogosphere is almost exclusively neoliberal. Ask for a prominent left-wing blogger and people are likely to respond with the names of Matt Yglesias, Jon Chait, Kevin Drum.... Each of them, as I understand it, believe in the general paternalistic neoliberal policy platform, where labor rights are undercut everywhere for the creation of economic growth (that 21st century deity), and then, if things go to plan, wealth is redistributed from the top to those whose earnings and quality of life have been devastated by the attack on labor.

I plead guilty to some general neoliberal instincts, of course, but I plead guilty with (at least) one big exception: I am very decidedly not in favor of undercutting labor rights in order to stimulate economic growth, and I'm decidedly not in favor of relying solely on the tax code to redistribute wealth from the super rich to the rest of us. What's more, the older I get and the more obvious the devastating effects of the demise of the American labor movement become, the less neoliberal I get. The events of the past two years, in which the massed forces of capital came within a hair's breadth of destroying the world economy, and yet, phoenix-like, have come out richer and more powerful than before, ought to have convinced nearly everyone that business interests and the rich are now almost literally out of control. After all, if the past two years haven't done it, what would?

I have a piece in the next issue of the magazine about the long-term disaffection of the liberal cause from organized labor, something that I've come to believe is the single biggest policy disaster of the American left over the past 40 years. Unfortunately, the piece makes clear why I don't write more about this: I don't know what to do about it. In fact, I'd say it's clear that organized labor long ago passed the point of no return, and there's really no feasible hope of returning it to a state of even moderate influence over American economic life. Practically speaking, then, the question is: what sort of ground-level, working class organization can take its place as an effective countervailing power against the economic interests of corporations and the rich — which, today, reign virtually unchallenged? But I don't know that either. Any ideas?

Friday Cat Blogging - 14 January 2011

| Fri Jan. 14, 2011 3:03 PM EST

It's winter here in Southern California, which means bitterly cold temps plummeting into....oh, the low sixties sometimes. And that means Inkblot needs a blanket to burrow under. Today, he's chosen an old American Airlines blanket that we reserve for his use. On the right, Scrabble Cat is helping Marian puzzle out her next play. Don't ask me why, but as soon as we pull out the Scrabble board, Domino instantly jumps up on the table and starts roaming around for no apparent reason. At least, for no reason apparent to those of us stuck in the mundane four dimensions of human reality.

Capitalism Update

| Fri Jan. 14, 2011 2:12 PM EST

Good news! Verizon has finally restored my mother's phone service about a month after it went out. The technician who fixed the problem was from Texas, and he was happy as a clam about the whole thing because he was due for mucho overtime and bonuses. But why Texas? Why not just send out a local guy? Answer: because so many Verizon phones have gone dead recently that their California crews can't deal with it. And why is that? According to the Texas guy, it's because Verizon is hellbent on converting their entire plant to fiber optic and has declined for some time to do any maintenance on their legacy phone lines. As a result, they've steadily deteriorated, and even a couple of weeks of rain can cause tens of thousands of homes to lose service.

Meanwhile, I am taking y'all's advice and seeing my doctor about my arm/shoulder/neck pain. (And just so you know: I haven't been ignoring this. I've actually tried lots of things over the past year, but none has had more than a modest effect.) However, here in the land of the best healthcare in the world, that means I've now got an appointment for late February.

American capitalism: it's the best in the world, as long as you don't need a phone or have a desire to see your doctor anytime in the current month. Huzzah!

Old Testament Economics

| Fri Jan. 14, 2011 12:39 PM EST

Paul Krugman:

A further thought inspired by the meditations that led me to today’s column: I think I now understand the otherwise weird resurgence of paleomonetarism in the midst of a prolonged liquidity trap. It’s not really about analysis, it’s about morality.

You see, if you’re the kind of person who views being taxed to pay for social insurance programs as tyranny, you’re also going to be the kind of person who sees the printing of fiat money by a government-sponsored central bank as confiscation. You may try to produce evidence about the terrible things that happen under fiat currencies; you may insist that hyperinflation is just around the corner; but ultimately the facts don’t matter, it’s the immorality of activist monetary policy that you hate.

Sure. Temperamentally, liberals are New Testament critters and conservatives are Old Testament critters. Conservatives believe in retribution. They believe in suffering for your sins. If you went into debt, it's right that you should suffer for it. If the economy partied too hard, a hangover is the proper cure. We may or may not learn from our mistakes, but it's still right and proper to pay for them.

The irony, of course, is that most of the tea party types who believe this are basically suffering for the sins of others. They've been conned into thinking that somehow they're the ones responsible for our economic woes, and the folks doing the conning are delighted to get away with this. I probably don't need to tell you who those folks are.