Thursday, February 24, 2011
Tuesday, February 8, 2011
Estimating the size of the multiplier
There has been a fair bit of discussion in places like the Wall Street Journal and the Financial Times about the Keynesian multiplier. Economists like Robert Barro insist the multiplier is insignificant and below one. He bases his argument in part on analysing data from the Second World war era to make his case. But there are a number of problems implicit in that data which alters significantly the value of the multiplier depending upon which years are subject to analysis and which years are used as the base year from the point of view of inflation. Quite clearly the greater the slack in the economy and higher the initial rate of unemployment the more likely it is for the multiplier to be larger since at lower rates of unemployment and at full employment there is the likelihood of state expenditures competing with private sector investment and possibly raising rates of interest.
However if we begin our analysis using 1939 as a base and examine the years 1939 to 1942 when unemployment was still elevated we can get a fair idea of what the multiplier was by examining the GDP data and establishing a base year for inflation. The rate of unemployment from 1939 to 1945 in the U.S. was as follows:
1939 17.2 %
1940 14.6
1941 9.9
1942 4.7
1943 1.9
1944 1.2
1945 1.9
So by focusing on the years 1939 to 1942 we can evaluate the multiplier in a more unbiased way because for three of those years unemployment was very elevated. The years 1943 to 1945 were years of extremely low unemployment and because of this we can expect the multiplier to be much lower in those years. If we use 1942 as the base year 100 then a dollar in 1939 was worth 1.11 in 1942 prices since inflation averaged 3.45 % per year from 1939 to 1942. Adjusting the GDP data to this base year of 1942 yields the following;
federal government expenditures in constant 1942 dollars
1939 6.06 billion
1942 52.027
difference an increase of 45.97 billion in constant 1942 dollars.
U.S. GDP in constant 1942 dollars
1939 100.34 billion
1942 159.6
difference an increase of 59.26 billion.
The multiplier 59.26 /45.97 is 1.29.
Data source: U.S. Department of Commerce for GDP data and U.S. Bureau of Labour Statistics for unemployment data.
However if we begin our analysis using 1939 as a base and examine the years 1939 to 1942 when unemployment was still elevated we can get a fair idea of what the multiplier was by examining the GDP data and establishing a base year for inflation. The rate of unemployment from 1939 to 1945 in the U.S. was as follows:
1939 17.2 %
1940 14.6
1941 9.9
1942 4.7
1943 1.9
1944 1.2
1945 1.9
So by focusing on the years 1939 to 1942 we can evaluate the multiplier in a more unbiased way because for three of those years unemployment was very elevated. The years 1943 to 1945 were years of extremely low unemployment and because of this we can expect the multiplier to be much lower in those years. If we use 1942 as the base year 100 then a dollar in 1939 was worth 1.11 in 1942 prices since inflation averaged 3.45 % per year from 1939 to 1942. Adjusting the GDP data to this base year of 1942 yields the following;
federal government expenditures in constant 1942 dollars
1939 6.06 billion
1942 52.027
difference an increase of 45.97 billion in constant 1942 dollars.
U.S. GDP in constant 1942 dollars
1939 100.34 billion
1942 159.6
difference an increase of 59.26 billion.
The multiplier 59.26 /45.97 is 1.29.
Data source: U.S. Department of Commerce for GDP data and U.S. Bureau of Labour Statistics for unemployment data.
Monday, February 7, 2011
Lowering unemployment in the U.S.
The U.S. headline rate of unemployment is dropping but far too slowly to comfort the millions of still unemployed American workers. There are various remedies available. The most important one is an additional large program of Federal investment in the environemnt, infrastructure and education.There also needs to be greater moral suasion in favor of greater job creation by the corporate sector which is sitting on plenty of cash and owes it to American workers and tax payers to start hiring again.
But there are other additional options. One of them would be to work with employers to subsidize a portion of the hourly wage or weekly salary that a prospective employee could earn for a limited period of time for qualified work. This could involve the redirection of some employment insurance funds, the creation of new funds either through zero interest conditional forgiveable loans where appropriate or actual short term grants in some cases. In addition to targeting those who have been unemployed for a long duration they could also tackle the more than 8.4 million workers who are only employed part-time when they would rather be working full time.
In April 2006 the U.S. headline rate of unemployment was 4.7 % and this category of underemployed workers stood at 3.9 million. This January the figure had reached 8.407 million when the headline rate stood at 9.0 %. In addition to a program aimed at the long term unemployed more than 27 weeks who number some 6.2 million, one could design a program that targeted these workers who already were working at jobs part-time but were underemployed and who preferred to increase their hours. This program could increase their monthly hours by say 10 hours a week at some basic wage of 20 -30 $ an hour subsidized by the Federal government for a period of six months. Employers could share in the program by paying a part of this cost or by paying for additional hours beyond this level. In this way one could leverage the advantage that existed in the already created job. The additional income thereby created would help bolster aggregate demand and lower the unemployment rate further while the economy continued to recover.
We have had a positive experience with this sort of approach in Canada in the past and I see no reason why with a bit of adjustment it wouldn't be helpful in the U.S.
But there are other additional options. One of them would be to work with employers to subsidize a portion of the hourly wage or weekly salary that a prospective employee could earn for a limited period of time for qualified work. This could involve the redirection of some employment insurance funds, the creation of new funds either through zero interest conditional forgiveable loans where appropriate or actual short term grants in some cases. In addition to targeting those who have been unemployed for a long duration they could also tackle the more than 8.4 million workers who are only employed part-time when they would rather be working full time.
In April 2006 the U.S. headline rate of unemployment was 4.7 % and this category of underemployed workers stood at 3.9 million. This January the figure had reached 8.407 million when the headline rate stood at 9.0 %. In addition to a program aimed at the long term unemployed more than 27 weeks who number some 6.2 million, one could design a program that targeted these workers who already were working at jobs part-time but were underemployed and who preferred to increase their hours. This program could increase their monthly hours by say 10 hours a week at some basic wage of 20 -30 $ an hour subsidized by the Federal government for a period of six months. Employers could share in the program by paying a part of this cost or by paying for additional hours beyond this level. In this way one could leverage the advantage that existed in the already created job. The additional income thereby created would help bolster aggregate demand and lower the unemployment rate further while the economy continued to recover.
We have had a positive experience with this sort of approach in Canada in the past and I see no reason why with a bit of adjustment it wouldn't be helpful in the U.S.
Friday, February 4, 2011
U.S. unemployment falls to 9.0 %
The Bureau of Labour statistics has published its January labour force survey which shows that U.S. unemployment has fallen to 9.0 %. The broader measure of unemployment that includes marginally attached workers and those working part-time when they would rather be working full time also has fallen to 16.1 % from 16.7 %. This is positive news although it would be nice to see a larger increase in the number of new jobs created.
Since November 2010 the headline rate of unemployment has fallen from 9.8 % to 9.0 %.
U6, the broader measure that includes discouraged workers and those working part-time when they would rather work full time has fallen from 17 % to 16.1 % in the same time period.
If this trend continues, unemployment should continue to fall provided there are no new shocks to the economy and the Congress does not precipitously slash spending or raise taxes on average and low income earners. The banks and the private sector needs to do more to spend their surpluses through new borrowings to business and new hirings to accelerate the process. Another problem is that the public sector , particularly at the state and local level, continues to shed jobs thereby undermining the recovery.
In Canada the headline unemployment rate rose from 7.6 % to 7.8 % but close to 70,000 new jobs were created. The previous months lower rate apparently encouraged more discouraged workers to rejoin the labour force searching for work thereby driving the headline rate up 0.2 % points. The rate of unemployment also rose in Québec from 7.5 to 7.9 %. The rate in Ontario remained at 8.1 % (where the participation rate is two percentage points higher than in Québec.)
Since November 2010 the headline rate of unemployment has fallen from 9.8 % to 9.0 %.
U6, the broader measure that includes discouraged workers and those working part-time when they would rather work full time has fallen from 17 % to 16.1 % in the same time period.
If this trend continues, unemployment should continue to fall provided there are no new shocks to the economy and the Congress does not precipitously slash spending or raise taxes on average and low income earners. The banks and the private sector needs to do more to spend their surpluses through new borrowings to business and new hirings to accelerate the process. Another problem is that the public sector , particularly at the state and local level, continues to shed jobs thereby undermining the recovery.
In Canada the headline unemployment rate rose from 7.6 % to 7.8 % but close to 70,000 new jobs were created. The previous months lower rate apparently encouraged more discouraged workers to rejoin the labour force searching for work thereby driving the headline rate up 0.2 % points. The rate of unemployment also rose in Québec from 7.5 to 7.9 %. The rate in Ontario remained at 8.1 % (where the participation rate is two percentage points higher than in Québec.)
Thursday, February 3, 2011
The lessons of history Egypt 2011 .
These are momentous days in Egypt. A major centre of civilization for 7000 years it is once again at the centre of turbulent events and the Zeitgeist of history which as always yearns for freedom and enlightenment. It is always an error of realpolitik for democracies to base their plans for the future on alliances with dictatorial autocratic regimes who reject their values of democratic debate,uncorrupted judiciary, rule of law, civil liberties, free association and electoral competition in a pluralist environment that respects differences of opinion about how to govern ones society.
People all over the world no matter their religion or culture, yearn for similar things and are guided by similar values: the opportunity to live at peace, earn a living that is materially adequate, raise a family, live in love and friendship and enjoy the fruits of life including the opportunity to participate in the governance of ones society. When these rights are denied systematically by autocratic personalities and authoritarian regimes it is only a matter of time before the regime will be challenged and eventually defeated, particularly if economic problems like high unemployment, poverty and social exclusion become rampant.
Fifty-nine years to the day in January 1952 when the Egyptian national revolution was sparked because of British colonial excesses after the incident at Ismailia where British troops killed a number of Egyptian policemen, the daily series of mass protests organized initially by social network savvy young people have convulsed Egypt and threatened to dethrone President Hosni Mubarak, the staunch ally of the West who despite the assasination of Anwar Sadat in 1981 has governed Egypt and protected the peace treaty with Israel and thereby contributed to peace in the Middle East and greater prosperity for the people of the region.
Mubarak, unfortunately despite these acts of friendship to the West has not learned the lessons of democracy. His regime has abused human rights, manipulated elections,undertaken torture of prisoners, allowed police abuses and not created enough jobs to ensure that growing prosperity is widely shared and youth unemployment kept low. The recent example of the Tunisian revolution has emboldened millions of ordinary Egyptians to publicly demand his resignation. But since
Islamic fundamentalism is understandably widely feared in the West and the Moslem brotherhood a powerful well organized force in Egyptian society, the U.S. and other western countries have been walking a tightrope trying on the one hand, to encourage President Mubarak to leave office and make way for a transitional government prior to general elections and on the other, calling for stability, peaceful transition and hoping for a continuance of the peaceful relations between Egypt and Israel.
The Brotherhood insists that it has changed into a peaceful organization that respects democracy and supports civil rights and wishes to participate in a democratic revolution. But no one can guarantee that this will rermain true once they become, as they are likely to, a major player in the new order. In addition in the past, according to some analysts, the Brotherhood has promoted crude anti-semitism in Egypt. So the dilemmas are real enough. The events in Egypt have a power and energy which is compelling. The fallout is bound to be substantial in both political and economic terms not just for Egypt but for Western economic stability as well.
But history teaches us that we ignore the need for democracy and its destruction at our peril. One can only hope that this Zeitgeist as it sweeps through the Middle East will deliver peace , prosperity and progress rather than their negation.
People all over the world no matter their religion or culture, yearn for similar things and are guided by similar values: the opportunity to live at peace, earn a living that is materially adequate, raise a family, live in love and friendship and enjoy the fruits of life including the opportunity to participate in the governance of ones society. When these rights are denied systematically by autocratic personalities and authoritarian regimes it is only a matter of time before the regime will be challenged and eventually defeated, particularly if economic problems like high unemployment, poverty and social exclusion become rampant.
Fifty-nine years to the day in January 1952 when the Egyptian national revolution was sparked because of British colonial excesses after the incident at Ismailia where British troops killed a number of Egyptian policemen, the daily series of mass protests organized initially by social network savvy young people have convulsed Egypt and threatened to dethrone President Hosni Mubarak, the staunch ally of the West who despite the assasination of Anwar Sadat in 1981 has governed Egypt and protected the peace treaty with Israel and thereby contributed to peace in the Middle East and greater prosperity for the people of the region.
Mubarak, unfortunately despite these acts of friendship to the West has not learned the lessons of democracy. His regime has abused human rights, manipulated elections,undertaken torture of prisoners, allowed police abuses and not created enough jobs to ensure that growing prosperity is widely shared and youth unemployment kept low. The recent example of the Tunisian revolution has emboldened millions of ordinary Egyptians to publicly demand his resignation. But since
Islamic fundamentalism is understandably widely feared in the West and the Moslem brotherhood a powerful well organized force in Egyptian society, the U.S. and other western countries have been walking a tightrope trying on the one hand, to encourage President Mubarak to leave office and make way for a transitional government prior to general elections and on the other, calling for stability, peaceful transition and hoping for a continuance of the peaceful relations between Egypt and Israel.
The Brotherhood insists that it has changed into a peaceful organization that respects democracy and supports civil rights and wishes to participate in a democratic revolution. But no one can guarantee that this will rermain true once they become, as they are likely to, a major player in the new order. In addition in the past, according to some analysts, the Brotherhood has promoted crude anti-semitism in Egypt. So the dilemmas are real enough. The events in Egypt have a power and energy which is compelling. The fallout is bound to be substantial in both political and economic terms not just for Egypt but for Western economic stability as well.
But history teaches us that we ignore the need for democracy and its destruction at our peril. One can only hope that this Zeitgeist as it sweeps through the Middle East will deliver peace , prosperity and progress rather than their negation.
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