Jared Bernstein and others on our economic outlook, the Fed, unemployment and #FedUp | Blog#42

This collection of analyses focuses on the outlook for employment for our precariat in the near term.

New Pictures From CBO on the Extent of the Damage | Jared Bernstein | On the Economy

August 25th, 2015

The Congressional Budget Office just released their periodic update of our fiscal and economic outlook. Journalists often focus on their deficit projections as that’s the coin of the realm (the budget office found that near term deficits go down before they start going up). But I’m here to show you what I humbly submit are two important pictures of just how lasting and relentless economic slack—the under-utilization of our economic resources, including people—has been over this business cycle.

The first picture shows potential GDP against actual GDP in real dollars, where potential GDP is the output you’d expect at full employment. The recession is clear but note that all the way through the first half of this year, actual GDP still hasn’t linked up with potential.


The second figure applies the same sort of concept to unemployment, with the “natural rate” line giving you CBO’s estimate of the jobless rate commensurate with full employment.


The cost of these gaps is staggering. Output forgone is lost forever. Families that struggled with long months of unemployment can’t get those months back. The gap between actual and potential GDP in 2014 amounted to 4% of GDP—about $700 billion in today’s dollars, over $2,000 per person. That’s $8,000 for a family of four that’s missing due to these persistent gaps.

What’s “interesting”—as in “depressing”—about this is that the obsessive focus on the deficit has hamstrung the fiscal policy that should have been applied to closing these gaps. So pardon me if I don’t get flustered with joy that the deficit’s coming down or enraged that it starts going up again.

If policy makers had been doing their jobs, these gaps would have been closed well before today.

9 comments in reply to “New Pictures From CBO on the Extent of the Damage”

  1. Nick says:

    Very nice post. I’d just add that the CBO’s estimates are actually inconsistent with each other (my piece at CEPR):http://www.cepr.net/blogs/cepr-blog/cbo-s-estimates-of-output-gap-natural-rate-of-unemployment-show-discrepancy

    • Jared Bernstein says:

      Thanks for sharing that link, Nick. I had the same question re the data out today–the magnitude of their remaining output gap seems inconsistent with the fact that we’re almost at their unemployment rate at full employment. I wonder if slack not counted in the unemployment rate–LFPR gap and elevated involuntary part-timers–somehow explains the difference.

      • Nick says:

        I would guess that that is right. I think the definitional problem of only counting people as “unemployed” if they’ve searched within the past four weeks is proving unduly restrictive — works fine in normal times, but not when we’ve had a long bout of depressed demand, which can leave people out of work and cause them to stop searching for work. What’s interesting is that this isn’t just a problem of measuring “unemployment” versus “employment” — the U-4, U-5, and U-6 measures also show that the labor market is less recovered than the U-3 rate shows. So I think the specific definition of unemployment under the U-3 rate is a big problem.

    • Rima Regas says:

      Both excellent and complementary pieces. Thank you to the both of you.

      The only remaining question I have then, is what is our actual rate of unemployment? If U6 puts us closer to 11% than the official 5.something, then where exactly are we?

      On a related note… I’ve been reading Guy Standing on the precariat and even did a bit of my own “light” writing about it to familiarize the lay reader with the term. It would be nice to see a “good” piece on it to round out the discussions.

      • Jared Bernstein says:

        Hey RR: According to the Levin gap measure I used in a piece in the WaPo today, you’d roughly add a 1 or 1.5 ppts to the unemployment rate to get a better measure of slack, including the folks sitting out of the labor force and the involuntary part-timers.

        But “where exactly are we” is a harder question that it sounds like, because it assumes we know the unemployment rate associated with full employment (the way I read your question is “where are we relative to full emp”). If you think it’s 5% we’re closer than if you think it’s 4%.

As you just read in the comments following Jared’s piece, Nick Buffie of CEPR made some observations and included a link to his work. Here is a portion of it:

The CBO’s estimates of the output gap and the natural rate of unemployment appear inconsistent. Notably, the discrepancy disappears when we examine other measures of employment. For example, the prime-age employment rate, which I’ve previously argued is the single best measure of labor market slack, appears highly consistent with the CBO’s estimated output gap. The first-quarter output gap of $605 billion is compatible with a prime-age employment rate of 79.8 percent.** CBO estimates that the last time the U.S. didn’t have an output gap was the second quarter of 2006, when the prime-age employment rate was 79.7 percent (andunemployment was 4.7 percent). This implies that the prime-age employment rate, unlike the unemployment rate, is a consistent predictor of the output gap. Instead of being quite close to full employment—as CBO’s 5.38 percent natural rate of unemployment implies—both the output gap and the prime-age employment rate suggest that we are quite far from full employment. We aren’t likely to achieve full employment any time this year. At the rate that prime-age employment has been increasing, we are likely years away from a healthy labor market.

The craze to raise

August 27th, 2015 at 4:03 pm

I just don’t get this business about having to raise rates at the Fed, and now how it’s all like: hmmm, this China/markets thing may force us to push out the liftoff…but, as per Bill Dudley, president of the NY Fed, “I really do hope we can raise interest rates this year.” (H/t: Matt Yglesias).


Here’s a picture of year-to-year inflation using the Fed’s preferred measure–the core PCE–including this morning’s revised GDP for 2015Q2. The other line is the Fed’s 2% target, which they’re not just missing…they’re increasinglymissing.

It seems additionally odd that there’s now quite a resounding chorus of economists from various parts of spectrum scratching their heads about this craze to raise. Since Bernanke, the Fed has made venerable efforts to explains its thinking. Maybe I’m not listening close enough, but I’m pretty much hearing crickets on this one…whassup Janet, Stan, et al?


The craze to raise” reprinted with permission of Jared Bernstein.

 Joseph Stiglitz had an op-ed in the Los Angeles Times today:

Joseph Stiglitz explains why the Fed shouldn’t raise interest rates

“As central bank governors, Federal Reserve officials, economists and reporters convene for the annual economic policy retreat in Jackson Hole, Wyo., this weekend, the question on everyone’s mind is: Will the Fed raise interest rates come September?

The answer should clearly be “no.” The preponderance of economic data indicates that the predictable costs of premature tightening — slower job and wage growth — far outweigh the risk of accelerating inflation.

Six years into a lackluster U.S. expansion, price growth for personal consumption expenditures — excluding food and energy — has averaged less than 1.5% annually in the recovery, well below the Fed’s unofficial 2% inflation target. It slowed to 1.3% so far in 2015.

Global economic forces are poised to drive inflation still lower. Last week, oil prices fell to $42, a low not seen since February 2009. Europe’s growth remains anemic and is likely to remain so: The IMF forecast for 2015 is just 1.5%. And while it is difficult to piece together a precise picture of what is happening in China, most experts see growth slowing markedly, with effects in other emerging markets.

With a weaker euro and yuan, our exports will decrease and our imports increase. Together, this will put pressure on domestic businesses and the job market, which is hardly robust.

Despite a headline unemployment rate of 5.3%, the true labor market situation faced by working families in the United States remains dire. Millions remain trapped in disguised unemployment and part-time employment. As of July, the nation faced a jobs gap of 3.3 million — the number needed to reach pre-recession employment levels while also absorbing the people who entered the potential labor force. The true unemployment rate, including those working part time involuntarily and marginally attached, is more than 10.4%.

It is hard to see why the Fed would choose slower job and wage growth for most Americans just to protect against the theoretical risk of moderately higher inflation. But, then again, it’s often hard to understand the Fed’s policy choices, which tend to contribute to widening inequality in the United States.

Too often, after the end of one recession, the Fed, fearing inflation, has used monetary policy to dampen the economic expansion. Its maneuvers keep inflation low but unemployment higher than it otherwise would be, negatively affecting all workers, not just those out of a job. Workers in jobs face greater stresses, downward pressure on wages and diminished opportunities for upward career mobility. The costs of higher unemployment are borne disproportionately by people in lower-income jobs, who also tend to be disproportionately people of color and women.”


You’ve heard of the Federal Reserve, but have you heard of the “Fed Up”campaign?

August 27 at 7:00 AM

Led by a coalition of community-based organizations, labor and faith allies and policy advocates, including the Center for Popular Democracy, the campaign’s mission statement says that Fed Up “…stands with millions of workers and their families in calling on the Federal Reserve to adopt pro-worker policies for the rest of us. The Fed can keep interest rates low, give the economy a fair chance to recover, and prioritize full employment and rising wages.”

Now, I’ve been patrolling this corner of economics for a long time and I don’t recall anything like this in the past. And given the economic challenges facing working families and the centrality of the Fed in meeting those challenges, it’s a development I wholly endorse (I’ve advised the campaign on occasion).

Well, this week members of Fed Up, along with some simpatico economists, are following the Fed out to their annual Jackson Hole conference to press their case. I caught up with Dawn O’Neal and economist Josh Bivens of the Economic Policy Institute for a Q & A. Their edited remarks follow:

Dawn O’Neal

Jared Bernstein: Tell me a little bit about yourself.

Dawn O’Neal: Well, my name is Dawn O’Neal. I work as a teacher’s assistant at a day-care center in Atlanta, and I make $8.50 an hour. I do hard work, with 15 3-year-olds in a classroom, and I work 40 hours a week.

Bernstein: Why are you going out to Jackson Hole?

O’Neal: I’m going out to Jackson Hole because the Fed is talking about raising interest rates. And they said that the economy is stable enough to be able to handle it. Well, when I look around at the community that I live in, I don’t see the stability in the economy that they’re talking about. Like I said, I make $8.50. My husband is unemployed. In my community [DeKalb County, Ga.], I don’t see that economic stability. I still see people struggling.

Bernstein: When you say people are struggling, what do you mean?

O’Neal: There’s the jobless. There’s high crime in this community. It’s not a very economically stable community. And so I’m wondering if the people out at Jackson Hole have even taken into account the community that I live in and communities like this across the nation. Maybe they should have a conference here in South DeKalb County.

Bernstein: So, what is it that you want the members of the Federal Reserve to hear from you and your colleagues out there?

O’Neal: I want them to know what life is like for us right now, and how it will hurt job prospects in the community if they raise the interest rates in September.

Bernstein: Tell me why lower interest rates are important to you.

O’Neal: Once the interest rates are raised, everything is going to go up. That would affect all of us. For instance, the people that hold the mortgage for my apartment complex — if their mortgage rate goes up, where are they going to get the money to pay for that? They’re going to raise my rent. We’re already struggling now just to make rent of $660. Remember, I only make $8.50 an hour.

Bernstein: As an African American, you know the black unemployment rate stays higher than the white rate even in good times. Is that something you’d like to see the Fed consider?

O’Neal: I absolutely do. They say they have programs that they have put into African American communities, but we haven’t felt the result, or we haven’t seen any of it. And I think the Federal Reserve can do more. We’re hardworking – this community that I live in are hardworking people, and we want to work. Those who are unemployed want to work, but they can’t find work. People don’t want to live off of government handouts. They want to have a livable wage. They want to be able to go to work, work 40 hours and be paid what they’re worth. I don’t think the Federal Reserve is considering that in this community and communities like mine around the country.

Bernstein: Do you think the people in this country who are responsible for economic policy, like those in Jackson Hole or here in Washington, know enough about this economy that you’re describing – the one that you, your husband and your community face?

O’Neal: I think that they know all of the numbers and statistics, Jared, but I don’t think they know the real life and the real struggle of people that are in these low-income communities.

Read the rest of  The Federal Reserve and the ‘Fed Up’ campaign at The Washington Post

All of the pieces curated above amount to a snapshot of where we are with respect to our current economic situation, the state of employment, and our outlook, depending on what may or may not change in the monetary policies of Fed Chair Janet Yellen.

The consensus among economists is that raising the interest rates, especially at this volatile moment in time, is likely to trigger an adverse reaction on top of what is an already bad situation.

If you’re reading this far into what is a very information-dense collection of related posts, then you’ve probably gathered by now that what is in question is two-fold:

a) How our economic outlook  is assessed is problematic

b) Our ideas of what constitutes full-employment, how unemployment is measured and math that underlies each of its categories does not adequately reflect the true scope of the problem.

This ties into the discussion of our “lost generation” and the new term that is being used in Europe, “precariat.” While no one denies that there is now a precariat in the US, what no one can do, at this time, is give even a rough estimate of its size. Nick Buffie, in his first and second comments points to real problems with the way we count the unemployed and underemployed. To help you understand the magnitude of the problem, here are the BLS’s definition of the categories it uses to count people in its monthly statistical reports:


This is a big problem. We don’t really know and have no way to count people who fit categories that aren’t accounted for under the scheme above. If you were receiving unemployment benefits as a long-term unemployed from, say, 2009-2013 and are no longer receiving benefits and were unable to resume your career, you are no longer among those counted. It is my guess that there are millions like you who aren’t accounted for.

So, adding in what we do know about the current performance of our economy, as well as the very low inflation rate we are currently seeing, all of our top economists agree, to a voice, that this is no time to raise rates and that doing so carries grave long-term consequences over and above those we are still dealing with post-Great Recession.

The rise of grassroots movements like Moral Monday, as well as activist groups like Fed Up will be essential, over the next year, in pressuring the Fed into keeping its policies as they are until after the next election and, hopefully, the passage and institution of a robust package of economic policies.

It is most important for citizens to become even more engaged and join grassroots movements. At this time, our policy makers are at a complete standstill. We are just days away from yet another congressional threat to the debt ceiling. Remember when we nearly defaulted? Our government no longer does what governments are supposed to do. In the absence of Congressionally-approved economic policy with allocated budgets signed into law, his is what obstruction looks like when it is absolute, and why the Fed is the only government agency that is steering the huge ship that is the US economy. This isn’t how government was set up to work at its optimal and the reason why, years into obstructionist tactics by the GOP, it feels as if we are not progressing and misery abounds.

If this isn’t the case for greater voter involvement in the primaries to ensure we have better Congress-critters, then I don’t know what is, and we and our children are doomed.

Supplemental reading:

Jared Bernstein: The Phillips Curve is at best in ill repair, if not just outright broken

Rima Regas: Precariat: a new social class in America’s new normal

Rima Regas: Bernie Sanders’ approach to institutional racism, brutality and inequality parallels Martin Luther King’s

Rima Regas: In-depth analysis of Hillary Clinton’s economic speech

Rima Regas: Joseph Stiglitz’ rewriting of economic rules and Hillary Clinton









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