For the past couple of years economists have been arguing about whether our high unemployment level is cyclical or structural. The best evidence, I think, suggests that it's some of both: perhaps two-thirds cyclical and one-third structural. But even if it were more like 50-50, who cares? It still means that we have a huge amount of cyclical unemployment on our hands, and we ought to be doing something about it.

However, there's an aspect of this debate that I've never really taken the time to flesh out on the blog: if we are suffering partly from a structural unemployment problem, when did it begin? One of the most persuasive arguments against a significant role for structural unemployment is that it simply doesn't make much sense to think that, in the fall of 2008, American workers (and Greek workers, Irish workers, Italian workers, etc.) suddenly became ill suited in mass numbers to the rigors of the modern world. It just doesn't make much sense.

But if you look at an array of economic indicators, something a bit less sudden has always seemed to be lurking in the data: a structural change that started around 2000 but was masked first by the dotcom bubble and then by the housing bubble. So when the 2008 banking crisis touched off the Great Recession, a decade's worth of structural change suddenly became apparent all at once. No more masks.

I don't know for sure how much there is to this, but it's definitely been rolling around in the back of my mind for some time. The economy of the aughts was just too lousy to explain without something going on. Bush's economic policies may have been misguided in the long term, after all, but in the short term a bunch of big tax cuts, a housing bubble, and lots of war spending should have been fairly stimulative.

Which leads to the chart below, from a study released by the Kauffman Foundation. It shows that using two different measures, new businesses have been creating fewer jobs than usual over the past decade:

"While the recession certainly deepened the jobs deficit, the U.S. economy stopped producing enough new jobs well before the downturn," said Robert Litan, Kauffman Foundation vice president of research and policy and study co-author.

....The study [...] found that historically, new firms in the United States have generated about 3 million new jobs every year, but that recent cohorts have performed much worse, creating only 2.3 million jobs in 2009...."Not only are these businesses starting out smaller than their predecessors, they are staying smaller," said E.J. Reedy, Kauffman Research Fellow and study co-author. "Cohorts of businesses rarely add jobs in the aggregate as they age. A cohort’s initial level of employment is likely the maximum number of jobs it will provide over its lifetime. Thus, falling contributions of jobs at new businesses will be felt in the U.S. economy for years."

This is just one data point, and it doesn't (or shouldn't) diminish the need for monetary and fiscal action to reduce the cyclical chunk of our current unemployment problem. At the same time, it does suggest that there are structural issues at work too, and they've been at work for a while. We just didn't notice them so much when the good times were rolling.

From Jonathan Rauch, guest blogging for Andrew Sullivan:

If some strange magnetic pulse wiped out every blog post written since the format began, hardly anything memorable or important would be lost; and, after 15 years or whatever, it's too late to hope for maturation. The medium is the problem. The Web is great for shopping and research, but intrinsically lousy for serious reading and writing. Over the past decade and more, the most striking fact about the blogosphere is how little it has produced of distinction or durability.

Oh yeah, that's going to go over well. It's pretty much true, of course, since your average blog post is about as durable as a story in a daily newspaper, and you know what they say about yesterday's news, don't you? It's also pretty much true of the weekly column writing business, though I suppose you can at least collect those in a book and pretend that they've found immortality that way.

Of course, some mediums are designed for posterity and some are designed to help readers make sense of the daily grind in real time. I hope Rauch hasn't gotten the two mixed up.

This is interesting. A few years ago, as part of the worldwide ban on CFCs to protect the ozone layer, CFC-based asthma inhalers were banned. Asthma sufferers everywhere complained about this, because the replacement HFA-based inhalers didn't work as well. They fingered the culprits as an unholy alliance of idiot bureaucrats and overbearing environmentalists, who banned the inhalers even though their contribution to ozone destruction was minuscule and all other CFC uses had already been eliminated.

I love the ozone layer as much as anyone, but I was sympathetic to the asthma crowd. Thus I was interested to read Nick Baumann's piece in the current issue of MoJo explaining who was behind the CFC inhaler ban. As it turns out, it wasn't really environmentalists who made the big push, it was the manufacturers of asthma inhalers:

Pharmaceutical companies, worried about the emergence of generic competition, soon spied an opening. If they could create and patent a new variety of CFC-free inhalers, securing the exclusive rights to sell them, they could force off-brand competitors out of the market and jack up prices.

....The pharma consortium transformed from primarily an R&D outfit searching for substitutes for CFC-based inhalers into a lobbying group intent on eliminating the old inhalers. It set up shop in the K Street offices of Drinker Biddle, a major DC law firm....The lobbying paid off. In 2005, the Food and Drug Administration (FDA) approved an outright ban on many CFC-based inhalers starting in 2009.

....The switch to the new inhalers will cost American consumers, insurance companies, and the government some $8 billion by 2017, according to FDA estimates. That's money in the drug companies' pockets. In 2007, a top market-research firm alerted investors that the US inhaler market "will soon change from low-value to significant." Sure enough, at nearly $1 billion a year, sales of the market-leading inhaler, ProAir, now rival Viagra's.

Maybe the ban on CFC inhalers would have happened anyway. But even if it did, there was no special reason that it had to wipe out the generic market for asthma inhalers at the same time. So score one for big pharma. By my count, that makes the current score Big Pharma 873, Taxpayers 0.

A reminder for everyone writing about the debt ceiling games: We don't reach the debt ceiling on August 2nd. We reached it two months ago, on May 16th. Treasury has been playing games ever since ("borrowing" from pension funds, suspending securities that help states manage their finances, etc. etc.).

August 2nd is merely the date when the games run out and we actually stop paying some bills. But just for the record, Congress blew through the debt ceiling long ago and has been mucking around ever since.

From Upton Sinclair, on politics:

It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

This goes a long way toward explaining Congress and its indifference to our economic woes in a single sentence.

Via YouGov, here is all of modern American politics explained in a single handy chart. Enjoy.

It's finally time for Friday catblogging, and not a moment too soon. It's been pretty warm around here this past week, so the cats have been stretching out to cool themselves off. On the left, Inkblot is striking his beached-killer-whale pose. On the right, Domino is hiding. Can you find the cat in this picture?

Karl Smith, Matt Yglesias, Paul Krugman, and others have a bunch of good charts today showing that public sector employment has fallen pretty dramatically over the past three or four years. Karl estimates that compared to trend growth, government at all levels has shed about 2 million jobs. So as Paul Krugman says, "When you hear Republicans saying that what we need to do to create jobs is slash government spending and cut government payrolls, that’s exactly what has been happening for the past year, as the Obama stimulus has faded out."

But here's another chart. It's not as dramatic as the others because it covers a longer time period, but it shows something important: federal employment really isn't all that important. It's been relatively flat for the past four decades, while the real action in public sector employment has mostly been at the state and local level. So when conservative politicians rail against the explosion of the federal bureaucracy, they're wrong on multiple counts. It's mostly local government jobs that have grown over the past few decades, and it's mostly local government jobs that have been lost over the past few years — and this has acted as a huge drag on the economy. If stimulus money should be going anywhere, that's where it should be going.

The Cost of Default

Here's an interesting factlet from Bruce Bartlett. He's addressing the question of whether a "technical" default — i.e., one in which the Treasury Department misses payments to bondholders for just a few days — would affect interest rates. It turns out that we actually have a case study on just this question:

Some may think that a rise in rates would be temporary. But there was a case back in 1979 when a combination of a failure to increase the debt limit in time and a breakdown of Treasury’s machines for printing checks caused a two-week default. A 1989 academic study found that it raised interest rates by six-tenths of a percentage point for years afterward.

Yikes! Six-tenths of a percentage point is a lot of money. My back-of-the-envelope chicken scratching suggests that if this happens again it would cost the government something like $50-100 billion per year. In other words, no matter what debt ceiling deal we reach, upwards of half of it could be wiped out by higher interest costs if it comes too late to prevent default on the debt.

That probably won't happen, since even in the worst case I assume that Treasury will prioritize debt payments ahead of everything else (and Treasury's check printers will continue to function). But that's still a mighty big chunk of money to be gambling with.

This story is close to unbelievable. It's worth sitting through the 15-second ad to watch it. The moral, apparently, is that big banks figure they can do anything they want, and unless you get a lawyer on your side they just don't give a damn about whatever damage they've caused. This is just appalling.