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Math and Economics Are Hard!

Monday, 31 January 2011 05:36

That is pretty much what former Obama adviser Steven Rattner had to say in the Washington Post today. In his piece, Rattner told President Obama:

"don't blame the talented economists who were advising you .... Creating jobs is a slow and frustrating process in the wake of a tough recession."

Calling the president's economic advisers "talented" is good for their self-esteem (we know how important that is), but in the real world, their talent as economists must be judged by their performance. Missing the biggest asset bubble in the history of the world (a credential shared by all of the president's economic advisers) doesn't speak well for them. 

However even more important is their failure to generate jobs for the country's workers following the bubble's collapse, which has to be the top priority for economic policy. While job creation might be "hard" other countries have managed to do it. For example, Germany has managed to bring down its unemployment rate from 7.1 percent at the start of the downturn to 6.7 percent today. This was accomplished in spite of the fact that Germany actually had a steeper downturn than the United States.

Mr. Rattner's piece suggests one of the key causes of the administration's failure to generate jobs. Rattner highlights the more rapid productivity growth in the United States over the last decade than in other countries, in particular singling out Germany as country with slower growth.

While faster productivity growth is generally better than slower growth, this is not the case when an economy does not have full employment. In this context, faster productivity growth just leads to more unemployment. One of the key mechanisms that Germany has used to keep its unemployment rate down is work-sharing. This is a program where the government subsidizes firms for keeping workers on their payroll, but working fewer hours than normal.

An expected outcome of this program is lower productivity. The idea is that it is best to keep people employed, where they can still get most of their paycheck, continue to develop their skills, and maintain contacts with their fellow workers. The alternative of having them laid off would mean higher productivity in the short-term, but it could lead to millions of workers joining the long-term unemployed. It is very difficult for these workers to be subsequently re-employed, therefore leading to permanent losses to the economy. Of course a prolonged period of unemployment is also likely to be devastating to the unemployed workers and their families.


Comments (15)Add Comment
written by izzatzo, January 31, 2011 6:49
Mr. Rattner's piece suggests one of the key causes of the administration's failure to generate jobs. Rattner highlights the more rapid productivity growth in the United States over the last decade than in other countries, in particular singling out Germany as country with slower growth.

Exactly. This is why Obama's new economic team has adopted a Tom Friedman - Jeffrey Immelt Strategy to make Americans even more productive so even more Americans can be unemployed. Even those with no math skills at all understand how competition works.
Three thoughts
written by Ron Alley, January 31, 2011 6:52
First, Obama really is a conundrum. He seems to be a hyper-intelligent man, yet his choices -- especially his economic choices -- do not square with his intellect. He signed-on to the Paulson plan for rescuing the banks and upped the ante by permitting huge payouts of bonuses to the bankers who had played such a central role in creating, or at least exacerbating, the economic crisis. I'll always believe he chose Summers and Geithner by asking and answering the question, "What would W do?"

Second, the jobs issue doesn't appear to be on the Obama Administration's agenda. Where is daily/weekly/monthly appearance by the President supporting specific job creation events and mourning job loss events?

Third, to the extent that productivity means GDP (or other output measure) per worker (or unit of labor), productivity is merely a measure of corporate efficiency at labor arbitrage. The more production we offshore and then import finished good to be sold at a profit, the greater the numerator of the productivity fraction. The fewer workers employed in the United States, the smaller the denominator. This is, I believe, an area in which current economic thought falls short.
Part time work reduces unemployment????
written by Ralph Musgrave, January 31, 2011 7:40
“One of the key mechanisms that Germany has used to keep its unemployment rate down is work-sharing.”

Isn’t that statement just semantic trickery? Take an economy with one million full time workers and one million unemployed. If the one million unemployed are forced or induced to work half time to enable the unemployed to work half time, I’d say you have exactly the same amount of unemployment: two million people part time unemployed instead of one million full time unemployed.
written by dunkelblau, January 31, 2011 8:36
Why the focus purely on jobs? The real story here is loss of income, and it's not only the laid off who are the victims. These past couple of years retirees living off the interest on their CDs have seen their incomes plummet just as steeply as those who went from paycheck to UE check. Some are now being forced to start gambling in the Wall Street casino, and we all know how that'll turn out. How many jobs has this low interest rate environment actually saved? Or has this little episode been about bankers setting themselves up for large bonuses all along?
Rattner pension corruption
written by AndrewDover, January 31, 2011 8:54
Some quotes from:

http://www.ag.ny.gov/media_center/2010/apr/pdfs/QUADRANGLE AOD.pdf

39. In November and December 2004, Rattner and the former principal spoke with Morris about hiring him to market QCPII to a variety of pension funds, CRF included. Although at the time Quadrangle had understood from Monument Group it was likely to receive an investment of $20 to $50 million from CRF (with the most likely scenario being $25 million), Morris told Rattner he could increase the size of the investment and therefore Quadrangle should pay him on the upside.

40. In or around December 2004, Quadrangle, .., agreed in principle to a fee arrangement with Morris. ... was to be paid 1.1% of aggregate investments ...

44. At the end of January 2005, CRF recommende­d a $100 million investment in Quadrangle­. This was two weeks after Rattner notified Morris that Good Times would be distributi­ng “Chooch.”

68. In or around 2006, as Alan Hevesi was running for re-electio­n as Comptrolle­r, Morris called Rattner and expressed to him that he and Hevesi wanted Rattner to be helpful in his re-electio­n efforts. Morris added that others whose funds had received investment­s were also making contributi­ons. When Rattner explained he had a policy against making contributi­ons to officials with oversight over investment­s, Morris told him he should contribute money indirectly­, by getting a third party to make the contributi­on.

69. Thereafter­, Rattner asked a Democratic donor he knew to contribute to Hevesi. That person and his wife each subsequent­ly gave approximat­ely $25,000 to Hevesi for New York.

70. Shortly thereafter­, the CRF increased its investment in QCPII from $100 million to $150 million.”

71. Quadrangle has received approximately $5,000,000 in management fees from the CRF associated with the investments arranged by Morris.

written by Red Planet, January 31, 2011 9:24
I admire your durable good manners, Dean, and your persistence on the matter of how prominent economists and financial advisors "missed" the housing bubble. But these are not unintelligent people, and even the man on the street knew it was a bubble. I don't really believe they missed. They profited from it, and some of them clearly engineering it.

My friend SleepinJeezus, over at DagBlog, recently posted "The Failure Of A 30 Year Experiment In Reagonomics." He reminds us that:

It's no longer the objective of economic policy to improve the living standards of all Americans.

Maybe we should hang this quote on the bathroom mirror, and read it every morning while we're splashing cold water on our faces.

The President's Team
written by BradyDale, January 31, 2011 9:42
I know this comment is only a response to a cast-off point in your piece and I apologize for that, but this is the first it has occurred to me.

You said that everyone on the President's team missed the asset bubble.

I know the powerful economic elite have repeated the phrase "no one saw this coming" so many times that the general public actually believes it, but those of us who are follow news about the crisis closely and have read some of the histories already written know that that is hogwash. A lot of people saw it coming. In fact, a handful of people got very rich seeing it coming and many of them were not particularly quiet about their trades. Others were policy people who didn't make any money but can now say "I told you so." Many non-profit leaders can say the same.

Are you saying that the President hasn't hired ANYONE for who is economic team who was on the right side of the banking crisis before it was a crisis? That's remarkable. And disturbing.
The Bear's Lair
written by Martin Hutchinson, January 31, 2011 10:28
Spot-on. We come from opposite ends of the political spectrum but I too have highlighted long-term unemployment as by far the biggest cost of this recession. You can put the blame on Fed easy-money policies since 1995, which have produced a cascade of bubbles, each less productive than the last. Needless to say, we are currently in another such, and the "dip" from its bursting won't be pretty. Hopefully we can agree that removing Bernanke and "Volckerizing" the Fed is essential going forward, even though we will disagree about other parts of the diagnosis.
"Lump of labor fallacy"!
written by Dan the Man, January 31, 2011 10:55
"Lump of labor fallacy"! OK, I don't really believe this, but that's because I don't believe in the LOLF. But your description of the German program is a classic LOLF situation.

Here's your description of the German situation: " One of the key mechanisms that Germany has used to keep its unemployment rate down is work-sharing. This is a program where the government subsidizes firms for keeping workers on their payroll, but working fewer hours than normal."

And here's https://secure.wikimedia.org/wikipedia/en/wiki/Lump_of_labour_fallacy the wikipedia description of the Lump of Labor fallacy: "Historically, the term "lump of labour" originated to rebut the idea that reducing the number of hours employees are allowed to labour during the working day would lead to a reduction in unemployment."

So, why do you think you're not suffering from the LOLF?
written by Notorious P.A.T., January 31, 2011 11:30
How dare you question the talents of the president's advisers? They have degrees from the "right" schools and nice suits--isn't that all one could ask for?

Look at Larry Summers: he helped bring about this crisis in the first place by pushing for deregulation, then did a terrible job of managing Harvard's endowments while making a fool of himself by trying to get women to stop studying math. But. . . he worked for presidents! He must know something!
written by skeptonomist, January 31, 2011 2:42
The "lump of labor" argument apparently assumes that compensation is reduced along with hours. What Dean advocates, and what Germany apparently implements, is maintaining total compensation with government subsidy as hours are reduced. This reduces supply while maintaining demand. This is a Keynesian solution which transcends the "lump of labor" argument (if I understand it correctly). This avoids the moral objection to giving money to people who are not actually working (because they have been fired in a recession).
LOLF Dogmatic Clap Trap
written by NewsFromAnnArbor, January 31, 2011 6:35
So, why do you think you're not suffering from the LOLF? Because German workers did not take a cut in take-home pay when the work sharing plan kicked in. If take-home pay is reduced a proportionate amount to the hours reduced, the result will be less demand and no improvement in demand for labor. However, if productivity increases are used to reduce the number of hours worked while holding the annual compensation at the same level or higher (an increase in the hourly rate of pay for hours worked), demand for labor will increase.
More Details
written by S.D. Jeffries, January 31, 2011 9:11
Some commenters here seem to be assuming that German workers retained their entire salary when work-sharing was introduced. This is not true. A more detailed description of what happened to worker pay, and how the split between government and employer payment was determined, in an earlier entry on this very blog on July 1, 2010 by Dean Baker himself. Titled "If Germany Is a Winner, It Is Partly Because It Has Work Sharing," the entry contains links that further explain the program:
written by yeszatso, February 01, 2011 12:14
Since when did "business" become concerned with "the economy" in a macro sense?
written by kharris, February 01, 2011 2:43
Time to Beat the Baker, I'm afraid.

Blaming Obama's advisers for the fact that the US does not have a German-like employment system is a bit misleading. Obama's advisers are not bound to offer only policy recommendations they think are politically feasible, but that is probably what they do. Obama needs to tell them that he wants a wider range of policies from which to choose if he in fact does. It is reasonable to assume that Obama's advisors are doing what he has asked them to do, with the exception of Summers, who recommend his own preferred policies, regardless of marching orders.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.