Lee Ohanian on the Great Recession and the Labor Market
Aug 20 2012

Lee Ohanian of UCLA talks with EconTalk host Russ Roberts about the recession, the recovery, and the state of labor market. Ohanian describes the unusual aspects of this recession and recovery in the United States as shown by the labor market and the unusual performance of hours worked, productivity, and wages. He also discusses the behavior of business investment and speculates as to why this recession and the recovery has been so different in the United States. The conversation closes with a discussion of the role of the foreclosure process in encouraging unemployment.

Andrew McAfee, Megan McArdle, and Lee Ohanian on the Future of Work
Andrew McAfee, Megan McArdle, and Lee Ohanian talk with EconTalk host Russ Roberts on the future of work. Recorded before a live audience at the 33rd Santa Barbara Economic Summit, the conversation begins with each participant making a brief set...
Erik Hurst on Work, Play, and the Dynamics of U.S. Labor Markets
Erik Hurst of the University of Chicago talks with EconTalk host Russ Roberts about the state of the labor market in the United States. Hurst notes dramatic changes in employment rates for men and speculates about the causes. Two factors...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Aug 20 2012 at 9:47pm

An amazing and eye-opening discussion. The fact that the causes and duration of the Great Depression have been seriously studied by so few economist (with a few notable exceptions) over the past 70 years is a profound mystery. Ohanian’s research and findings make the sort of sense that make one wonder, “of course… why didn’t this become conventional wisdom decades ago?” What sort of suspension of disbelief enabled leading economists to believe for decades that government-enabled price-fixing and cartelization weren’t a major cause of damage to the economy?

Jay Balapa
Aug 20 2012 at 11:34pm

Very good podcast and even though I agree with the thesis that the structural issues are the main causes of high levels of unemployment sub par recovery but I Disagree about the reason offered.

My take which is just my intuition is Free Trade along with Perverse corporate incentives offered to a wall street CEO to take short term decisions are the main reasons for the long term structural issues.

Because of Free trade dogma immediate profits, persistent trade deficits are causing large companies to relocate their manufacturing operations overseas to the far east. As a side effect entire echo system along with all the part suppliers are forced to relocate.

So to compensate for the lack of rise in real wages population engages massive speculation first in stocks and next in real estate to maintain the standard of living. When the bubble burst most of the wealth is stolen by Financial intermediaries in commissionsprofits.

So basically now the entire populations are stuck with huge debts, lack of manufacturing jobs and massive government spending to compensate for private sector.

The only way out is to follow prescription offered by Warren Buffet which is to implement Import Certificates.

Greg M
Aug 21 2012 at 12:34am

I was intrigued by the trend in average hours worked per quarter that you discussed early in the podcast (Figure 1 in “The Economic Crisis from a Neoclassical Perspective,”), and especially the large rise in hours worked from about 1982 to 2001. In the discussion, there was some attempt to explain that by a reduction in tax rates, but Russ pointed out that tax rates rose in the 1990s. He didn’t point out that tax rates declined after 2001, and employment declined. So the impact of tax rate changes doesn’t seem very consistent. The “internet boom” was invoked without any systematic empirical support.

Since I have become curious about the role of energy prices on economic performance, I obtained an updated version of the average hours worked from Cociuba et al. (2012) and compared that trend to US energy expenditures as a percent of GDP obtained from the US Energy Information Administration. The result appears here. Because the variables are negatively correlated, I ordinated the energy expenditure axis with high values toward the bottom and low values toward the top. The 1970-2011 time frame was the full extent of the energy expenditure data.

Over the entire 1971-2011 time frame a regression of these two variables produced an R-square value of 0.47, but the correlation is not consistent over time. For the period from 1982-2001 (from the initial Reagan tax cut to the Bush tax cut), the R-square is 0.90. From 1982 to the start of the housing collapse in 2008, the R-square drops to 0.77. In 2006-2008 the average hours worked was one to two hours per week greater than expected based on the regression for the 1982-2001period. In 2009 and 2010 the average hours worked was one to two hours per week less than expected value based on the correlation with energy expenditures for the 1982-2001period.

Of course correlations may be spurious and do not prove causation. But a possible explanation for the correlation could be that outside the energy production sector, reductions in energy expenses frees up operating resources for employers to hire more workers. Conversely when energy becomes more expensive these employers tend to cut back on workers. The opposite pattern would tend to occur in the energy production sector: more hiring would occur when energy is expensive.

I have yet to find a good source that quantifies employment in the energy production sector, but I suspect it is a relatively portion of US employment because it seems that most of the US economy has responded negatively to significant increases in energy prices, except for the energy producing states, such as Texas, Alaska, Oklahoma, West Virginia, and more recently North Dakota.

While other factors surely are at work, it seems to me that variations in energy expenditures ought to be among the factors considered when discussing reasons for variation in employment, particularly for 1982-2001.

John K
Aug 21 2012 at 5:17am

I assert that the reason worker productivity remains constant, in spite of high unemployment, is because we don’t need as many people to actually do the work needed to keep our economy running. I work in high tech and I can tell you that technology is basically automation. What used to take a dozen or more people working for two years can be done by one person in one month with free open source software. Add to this the fact that the Internet is getting rid of the middleman or at the very least making it very hard for them to survive. Talk to retail folks about the growth of “showrooming.” Travel agents, stock brokers, real estate agents, newspapers, etc. have all been decimated. We can do more with a smaller, more skilled, work force. This was supposed to be a good thing.

We are reaping the promised benefits of the Industrial Revolution – less need to work, more time for leisure, more time for family, etc., but it hasn’t arrived in the form expected – high unemployment. The real problem is what are we going to do with a growing underclass that can’t participate in the economy?

Mort Dubois
Aug 21 2012 at 7:01am

I’m surprised that an argument based on a per capita statistic didn’t include any discussion of demographic trends. Is it any coincidence that hours worked per capita peaked when the baby boomers entered their peak productivity years, and when women were entering the work force for the first time? And now that they are starting to retire, that ratio is bound to fall significantly. The tax argument is interesting, but as Russ points out, something different was clearly happening in the 90s. I’d be surprised, since the average American doesn’t understand how the tax system works, if those rates really influence labor participation as much as basic demographic trends.

As for the productivity per worker mystery, I think that John K has nailed it. Automation is becoming more and more effective, and will replace workers farther and farther up the skill and intelligence ladder, with concomitant high unemployment and low demand. It’s moving from the shop floor to more service oriented tasks, and taking out many of those jobs. Our system currently has no way to cope with this, and it doesn’t take a genius to see that it’s going to cause a lot of trouble in the near future. That could be a reason that businesses aren’t investing their cash.

So just like a large number of factors combined to create this Great Recession, a large number of unfavorable trends are combining to hamper the recovery from it. And the clown show in Washington offers no reason to be hopeful.

Thanks for another interesting and provocative podcast, Russ – it’s the highlight of my week.

Aug 21 2012 at 10:16am

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Aug 21 2012 at 12:02pm

Jay Balepa, I agree that the lower wages of overseas workers is a major cause of both unemployment and slow wage growth among unskilled workers in the United States. However, I don’t believe that things would be better in the absence of free trade. I would argue that those who are most economically challenged within our borders are benefitting greatly from the cheap products that come into our border as a result of low overseas labor costs.

In short, I don’t think reducing our prosperity by increasing the price we pay for goods (how much of our labor is required for a given good) will magically make things better for the unemployed.

Mads Lindstrøm
Aug 21 2012 at 12:50pm

The podcast touches home production and I am wondering if there is any data on the subject. I would love to see a comparison on a country-by-country basis. Even better if it is correlated to paid work and marginal tax rates.

Greg M
Aug 21 2012 at 3:01pm

Mort Dubois writes:

“Is it any coincidence that hours worked per capita peaked when the baby boomers entered their peak productivity years, and when women were entering the work force for the first time? And now that they are starting to retire, that ratio is bound to fall significantly.”

The hours worked statistic is per capita of the noninstitutional population aged 16 to 64. Some of the decline after 2000 might be due to baby boomers entering retirement before 64, but would you expect such steep declines from this? I don’t think so.

Greater female participation in the workforce identifies the changing gender mix in the workforce, but it does not explain either the upturn or the downturn. Where did employers get additional resources to employ larger numbers of women between 1982 and 2001? Part of it surely came from increased investment, but the declining and low cost of energy (relative to the 1970s) allowed for a greater allocation of investment in wages. The employment downturn after 2000 coincides with a period of increasingly costly energy.

I also suspect that John K is correct in that the net result of IT, automation and the internet is to reduce employment which may account for much of the decline after 2000. But this has been an ongoing process, and in the past new investment opened up new employment opportunities as old ones disappeared. New investment seems not to be keeping pace. Much attention is given to near term fiscal uncertainties that may discourage investment, but there have also been significant geopolitical uncertainties brought on by events such as the 9/11 attacks, and ongoing conflicts around the world which have probably increased volatility in energy markets and stock markets.

Steve Sedio
Aug 21 2012 at 4:39pm

To amplifly what John K wrote.

Automation and robotics have replaced many low skill jobs, to save cost, reduce/eliminate injury, and improve quality. Automation costs drop with volume, and with computing power. In time there will be little need for unskilled labor. (Even in China)

The work the machinist does in the podcast “Adam Davidson on Manufacturing”, has already been automated, when the volume is high enough. And, “high enough” keeps getting smaller.

Creativity is hugely augmented by software and fast computers. There is little design work that isn’t done virtually, in far less time – from automobiles to interior design.

Podcasts (like this), even on-line classes like those from MIT and Berkley are providing the of educators (and, when it can be used, not 20 years ago). The same applies to doctors, lawyers and other professionals. Data mining and AI software excel where professionals are weak, and are closing in on areas where they are strong.

Productivity per person has increased in ever increasing steps with the ag revolution, the industrial revolution, and now the technology revolution. (We can only afford the level of socialism we have today because of that increase in productivity.)

We have our current level of unemployment because the number of people working are all that is needed to produce the goods being bought. This will get “worse”.

Russ and other economists say automation frees up people to do more creative and rewarding work. Is there enough creative work to employ everyone?

IMHO, we are at the beginning of the next great transition, where the percent of the population needed to keep the standard of living increasing, keeps decreasing.

(Economics is the study of how to address the scarcity of resources – do they understand the implications that resources are becoming less scarce?)

The final result is an era where everyone can have pretty much what they want, without needing to work for it.

The questions we will need to answer are, how do people earn the “money” needed to buy things and what do people do with their time? (Where do we get the energy to power it all?)

The technical issues are solvable, the people issues are going to be the problem.

It is going to be a bumpy transition.

Aug 21 2012 at 6:50pm


“An amazing and eye-opening discussion. The fact that the causes and duration of the Great Depression have been seriously studied by so few economist (with a few notable exceptions) over the past 70 years is a profound mystery.”

I’m sorry this is the impression that you got from the podcast, but it is not accurate. There is no macroeconomic event (and likely no event) that has been studied more than the Great Depression. This is likely why Ohanian’s advisers were reluctant to encourage him to write a Great Depression paper. The field was very saturated by some impressive people.

I think a good portion of Ohanian’s contribution was bringing the Real Business Cycle model, which was developed in the 1980s back to describing the Great Depression. It was generally believed that the RBC theory could not explain the Great Depression. The consensus was (and arguably still is) that the Great Depression was caused in large part by lack of demand. RBC has no place for demand-side recessions, which is why Prestcott (it’s leader and co-founder) thought we had no understanding of the Depression. Cole and Ohanian in large part are arguing that RBC theory can, in fact, plausibly explain the Great Depression.

Aug 21 2012 at 8:57pm

“Russ: Which is why–we had a previous interview with David Autor out of MIT on the growth in disability rolls. Tremendous growth. Guest: Huge.”

I came across this statistic today, and thought I’d just put a number to “huge”.

“… the total number of private-sector jobs is still 4.3 million below the January 2008 peak. Meanwhile, since 2008, a staggering 3.6 million Americans have been added to Social Security’s disability insurance program.”

That’s from an article by Niall Ferguson in Newsweek.

If those numbers are correct, they seem to point to a structural difference in unemployment that may not have existed previously. As the Autor podcast explained, only about 1% of people leave the disability program voluntarily. Just looking at the two numbers, it’s almost as though the disability program has filled in the gap. That must be having some effect on the wages in the broader economy.

JAy Balapa
Aug 22 2012 at 12:58pm

Ken: I do agree with you that in a trade war poor people are affected the most since cost of imported goods will increase.

But it is also a Chicken and an egg problem where somebody has to take the first step.

Also Buffet’s import certificates idea is not based on tariffs, it will just make sure free loaders in free trade are brought in line.

One more thing I don’t buy is this automation concept. Technology has been improving for hundreds of years and provided us with more abundance than ever before.

Greg G
Aug 22 2012 at 1:18pm

The argument that foreclosure delays are increasing the unemployment rate seems very weak.

When the subject was first addressed Ohanian made it sound like being an unemployed squatter was such a good deal that it should be appealing to a lot of people. Russ did a good job of challenging the psychological aspects of this claim. And, as it turned out, Ohanian was making a more modest claim than it first appeared. And it was also a claim he had some data to back up. He did convince me that maybe one half of one percent of the unemployed are such slackers that they may need the threat of imminent foreclosure to take an undesirable job.

Even if this is true, there is no reason to believe it is raising the unemployment RATE at the present time. If the problem is a shortage of low skilled jobs, then the housing situation of the workers hired will not change the unemployment rate. Even if the (about to be foreclosed on) workers do take the mostly low skilled jobs being offered them, they will just be denying those particular jobs to some other unemployed workers. The unemployment rate will only be affected if the jobs go unfilled – which will not happen as long as those jobs are in short supply.

He seems to be simply assuming the thing he thinks he is proving here. Am I missing something?

Aug 22 2012 at 5:54pm

I believe at this point it may be in the best interest of the economy to just go ahead and raise taxes. Everyone knows that its going to happen at some point. Not the best solution but perhaps it would alleviate some of the uncertainty and start to reduce the debt.

John King
Aug 22 2012 at 6:12pm

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Aug 22 2012 at 10:41pm


After re-reading the transcript and taking a look at the paper, it seems pretty straight forward. Figure 2 in the paper shows how unemployment of the homeowner rises as the “days late” increases, but then falls when the house is actually in foreclosure. There are a lot of calculations in the paper, but essentially they find that the delayed effect is about 1/2% of the unemployment rate, which is about 700,000 jobs. That is at least 3 months worth of jobs so far in 2012.


Basically, I see this as somewhat human nature. Banks don’t foreclose, so people don’t make the tough decisions to relocate or sell their home at a loss or whatever. Also, if you consider free rent, extended unemployment benefits, and, at least for some disability insurance that includes free medical care, that puts a huge disincentive on finding new work. Using the $700 for the average mortgage + 1100 for unemployment + $500(?) for health care, you come up with $2300/month. That’s $27,600 a month or about $13.25 per hour. Now find a job that pays $13.25 an hour that includes all of those benefits, and you’ll see why people stretch things out as long as they can.

Greg G
Aug 23 2012 at 7:32am


I understand how a year’s worth of free lodging can weaken the incentives to work for unemployed squatters on the margin. I am not disputing that.

I am pointing out that, when there are several percentage points worth of shortage in low skilled jobs available, the refusal of one half of one percent of the unemployed to take those jobs cannot change the RATE of unemployment in the general population.

That would be different if there were enough low skill jobs available. In THAT situation the squatters refusal to take a low skill job would cause the job to go unfilled and would cause the unemployment rate to be higher.

In the current situation there are several people who want each low skill job available. So the housing situation of the possible employees for that job cannot affect the unemployment rate as long as someone else is available to fill that job.

We have a shortage of jobs, not a shortage of available workers.

Fred Giertz
Aug 23 2012 at 12:31pm

Contrast Ohanian’s statement: “Henry Ford actually did a modest wage increase. He hadn’t raised wages in a number of years.” with the popular view.

The recently deceased art critic Robert Hughes, in discussing a painting by Sheeler of the Ford River Rouge plant, said: “Ford ruthlessly cut wages (after the 1929 crash) and fired workers.”

I am sure Hughes had no knowledge of the real situation, but simply assumed it was true.

Jakob Engblom
Aug 23 2012 at 4:37pm

It is bad style to attack an interesting thesis on the basis of its data… but I must wonder just how good data on worked hours can be. For me, as a salaried professional, neither I nor my employer maintains any kind of precise record of how many hours I work. Statistically, I am hired to do 40 hours a week… but if I work 50 due to a big deadline, that will never show up. Since overtime pay is usually bargained away, there is no point in tracking it. So one part of the drop in hours could be more people being in the kinds of jobs where you do not track hours.

I agree with the sad effects of high marginal tax rates in Sweden. However, I personally feel the effect is rather to limit the attractiveness of higher pay – as I do not earn more from working more hours since my pay is a fixed salary. Regardless of tax, the incentive is not there, at least not directly.

What high marginal tax does mean though is that it is hard to build up large personal savings, and that the benefit from taking a more advanced position is greatly diminished when more than half the additional pay goes away in tax. So, yes, there is some kind of disincentive there.

Constantine von Hoffman
Aug 23 2012 at 6:24pm

Great show. Particularly appreciate the way Russ Roberts got Prof. Ohanian to put his comments about the slow foreclosure rate and its impact on job searches into perspective. That could easily be blown out of proportion if we hadn’t been told all the details of it. Specfically the fact that it only accounts for about .5 percent in the unemployment rate. That makes sense to me and without that fact it would have seemed like he was lambasting the unemployed — which clearly was not his intention.

As others have commented I was also struck by the discussion about the study of the great depression. In particular, Prof. Ohanian’s comments about how the federal government stopped going after the cartels and how that — along with the artificial wage control — what a huge impact that had both on the lengthening the Depression and, when it changed, in ending it.

I interviewed William Black — who prosecuted a lot of people in the wake of the S&L crisis — and he believes one of the causes of mortgage meltdown was essentially the defanging of regulators which began under VP Gore’s re-inventing government initiative. We are currently seeing the impact of that in the total lack of prosecutions by the federal government of people connected to the meltdown. Prof. Black’s point was that the prosecutors need good solid information from the regulators in order to win these cases and they no longer have that because the regulators weren’t doing what they used to do.

It seems to me that this is analogous to Prof. Ohanian’s points. If so then returning financial regulators to their previous antagonistic role needs to happen if we are to recover. I am definitely not saying that that is the one thing that would cause a recovery but it is likely a small but essential piece.

Constantine von Hoffman
Aug 23 2012 at 6:33pm

Rufus: “… the total number of private-sector jobs is still 4.3 million below the January 2008 peak. Meanwhile, since 2008, a staggering 3.6 million Americans have been added to Social Security’s disability insurance program.” That’s from an article by Niall Ferguson in Newsweek.

I agree with your position but given the huge number of significant factual errors that have been found in that article I think a better source for those statistics might be in order.

Greg M
Aug 23 2012 at 8:07pm

Continuing my obsession with the role of declining energy expenditures in enhancing the economic recovery of the 1980s, I’ve done a few additional calculations. The US Energy Information Administration provides estimates of energy expenditures in the broad sectors identified as Industry, Commercial, Transportation and Domestic. These are exclusive categories that add up to total energy use. To estimate the energy expenditures by employers, I added the Industrial and Commercial categories and 30% of the Transportation. The 30% estimate is based on my interpretation of information in a 2010 National Academy of Science analysis of energy

The sum of these estimated employer energy expenditures peaked in 1981 and declined $120 Billion/year (adjusted to 2011 dollars using the BEA’s GDP price deflator) by 1986 and continued at a similar level through 1988. Average hours employed hit a low in 1982 and then increased 39 billion hours in 1988. When I divide the energy savings from 1981 peak by the increased employment from the 1982 valley, the energy savings could finance an average of $3.22/hour of the increased employment through 1988. In 1983, the first year of the recovery, energy savings from 1982 could finance $7.23/hour of the increased employment. This last value seems quite significant. The 1983-88 average of $3.22/hr is less significant, but potentially consequential.

Aug 23 2012 at 9:31pm


Interesting data, and it certainly seems logical that there is some relation between the number of people working and the energy consumed.

However, while an employer could look at energy savings as a way to subsidize worker wages, they might also be driven to obtain those savings simply to maintain steady output at a competitive price. I doubt many CFO’s look at an energy efficiency project, such a refitting an outdated building, and then say “… if we do this project, we can save $1M and use that to employ more workers (or pay existing workers more)”. Instead, they’re likely to say “we’ve cut X% from our overhead, and we can fund new projects, pay into our underfunded pensions, etc.”

On our previous exchange, I accept most of your points, but I don’t necessarily believe that we have a shortage of low paying jobs. For example, there are several news stories about crops rotting in the field because no one is there to pick them. (related to laws about illegal immigrants). It may be that people do not want to take these jobs because they are hard work, but that does not mean they don’t exist. In some cases, policies have prevented those jobs from being created. For example, cities in California have passed laws requiring pay above the Federal minimum wage (+ benefits).


The hurdle the employee has to meet is producing ~$15/hr for the employer. If an employee can’t add more value than that per hour, the employer isn’t going to create the job. Saving on the electric bill won’t enter into the equation, and people who might be willing to work at lower wage rates are prevented from doing so by policy. That’s quite similar to the discussion in the podcast concerning wages during the depression.

Greg M
Aug 23 2012 at 10:24pm


thanks for your comments, but please note that there are two different Gregs commenting here (Greg M and Greg G).

My comments were not about energy consumption but about the money expended to pay for energy. The largest component of the decline in energy expenditure was not a decrease of energy consumption but a decrease in energy prices, especially the price of oil which declined from the equivalent of $100 per barrel in 1981 to $30 per barrel in 1988. When oil prices increased in the 1970s, it put increased demand on other energy commodities as consumers sought alternatives to oil. When the price of oil collapsed in the early 1980s, so did the price of the alternatives. Part of the collapse was due increased oil production from non-OPEC countries, and another part was due to conservation and reduced demand in the US. But a US enterprise investing in conservation would have to have been clairvoyant to have planned for the price decline since they could not predict future demand and supply. For the non-clairvoyant, the price decline was an unexpected bonus, which could be invested in any number of opportunities, including new workers.

Greg G
Aug 24 2012 at 7:39am


You are making the argument that we do not have a shortage of low paying jobs. I don’t believe that is the case but at least it has the virtue of being consistent with your argument. Whether or not it is true, it is not the argument made in this podcast. The podcast put much emphasis on the loss of low skill jobs.

On an entirely separate point Ohanian says:

Guest: “Yeah, the 1980s and 1990s–probably when economic historians look back on the 20th century, the 1980s and 1990s will be called the Golden Age of Economic Performance in the United States.”

I wonder if historians won’t say instead that this was a period of economic growth based on an unsustainable increase in consumer and government borrowing. Maybe historians will say the prosperity of this period was mostly borrowed from the future.

Alan McCrindle
Aug 25 2012 at 5:53am

This may sound a bit presumptuous but there is a simple explanation why US productivity hasn’t fallen in the US in this depression while it has in Europe and did in earlier US recessions.

If you have the capacity to lay off workers in proportion to the declines in demand for your products and services – which is what happens in a recession/depression – you can maintain productivity.

If however you decide to hold on to your workers when demand/production declines – for what ever reason such as loyalty or maybe even government compensation (Germany) – your productivity will decline.

In the USA a there has been a shift from privately owned companies to public companies and private equity. And with this has come a shift of values from a personal relationship and sense of responsibilities to employees who have helped you in your business to the value of maintaining the bottom line.

Or more bluntly public companies are more likely to respond to a downturn by laying off workers to maintain their Wall Street “numbers” because this is the value system underpinning their existence.

Privately held companies on the other hand are more likely to feel loyalty and obligation to their staff and are prepared to take personal losses or declines in income to keep their workers and people who depend on them in a job. They feel they are in it together.

In Europe there are at least 3 reasons I can think of why productivity fell

1. The value system in Europe is less “free market” more “human relationship” and equality centric. With this value system people are prepared to sacrifice together in the hope of surviving than with the relative individualist winner takes all that exists in the the USA
2. The proportion of the economy in the hands of “Public Companies” is lower in Europe – less propensity to fire to maintain Wall Street targets (numbers)
3. The European governments paid companies to maintain workers rather than see unemployment rise – if is difficult to work out how much of this was driven by values and how much was politically motivated

Then there are the questions of
1. How is productivity measured? Is it the same in all countries – I doubt it. In the USA productivity measurements include output in companies generate in other countries – eg China.
2. How has the definition of productivity changed over the last 50 years – one only has took at how the CPI (Inflation) and unemployment have changed. Political parties from all sides of the fence have a common goal to make inflation and unemployment look lower than they are to enhance their re-election.

Finally I ask myself why is it that economists can’t see the realities of what is happening in front of them? Maybe I have made a mistake in this analysis – I am bound to have missed stuff and got some stuff wrong.

The reason I am not an academic is that the job – for most people – leaves them isolated to the “real world”.

I hope some of you found this helpful and interesting.

Aug 25 2012 at 10:02am

Really enjoyed the podcast. Thank you. What I did find somewhat frustrating was the gloss over the role of finance in the problems in the economy. There is little doubt that the 20’s saw a hugh rise in credit which imploded and that there has been likewise a hugh rise in credit/debt leading up to 2008. The rampant control fraud which has been embedded and the complete lack of prosecution is completely missed in a system which arguably grew on the back of leverage and fraud.

Just maybe the 80’s was better because over 1000 went to jail for fraud in the S and L scandal and Glass Steagal kept at least the some of the theft at bay. This crisis is 70 x the size of the S and L fraud and yet zero prosecutions.

A grim reality is that smart econ grads sit in the IMF and the Fed and seem to be able to meditate on some finer point regarding productivity and to comfortably pontificate on the need for a reduction in wage rates in a country where 40 million are on food stamps, and income inequality is the highest it has ever been.

Inside the castle the King and courtiers eat well …..

Aug 28 2012 at 5:39am

@Greg G: You wrote:

He did convince me that maybe one half of one percent of the unemployed are such slackers that they may need the threat of imminent foreclosure to take an undesirable job.

Even if this is true, there is no reason to believe it is raising the unemployment RATE at the present time. If the problem is a shortage of low skilled jobs, then the housing situation of the workers hired will not change the unemployment rate. Even if the (about to be foreclosed on) workers do take the mostly low skilled jobs being offered them, they will just be denying those particular jobs to some other unemployed workers. The unemployment rate will only be affected if the jobs go unfilled – which will not happen as long as those jobs are in short supply.

He seems to be simply assuming the thing he thinks he is proving here. Am I missing something?

Well, yes you are. First principles. Supply affects price and therefor demand. Applies to wages as well as goods. The unavailability of workers who are not pushed into employment by imminent forclosure will mean that the wage rate that must be offered for any skill they possess must rise, and the supply of such jobs will fall. How much is an issue but the rate WILL be affected.

Aug 28 2012 at 5:50am

@David: It is not at all clear that raising taxes will reduce the debt. Admittedly starving the beast hasn’t worked much, but that doesn’t mean that expenditures won’t respond if an increased tax were available as an excuse.

Aug 28 2012 at 9:07am

@Gasndydancer Hard to starve the beast when you shovel hundreds of billions in war expenditures, hundreds of billions in bank rescue funds, and tens of billions in Medicare drug coverage expansions down its gullet.

Clinton remains the only person in US politics of the last many decades that gave a hoot about balancing the budget. Even Ryan’s plan is stuffed with so many revenue decreases and such vague(or so small as to be irrelevant) spending cuts that it would, even in the best circumstances, barely make a dent.

Aug 28 2012 at 9:25am

@Constantine von Hoffman: Is there someone who disputes the increase in the number of Americans who have been added to Social Security’s disability insurance program? The Fallows post you link to, despite your indicating that it will demonstrate a “huge number of significant factual errors”, doesn’t seem to mention any actual errors in the subject article.

(nb: Ferguson’s response, making that point, here.)

Aug 28 2012 at 9:33am

@Sebastian: Taxes in, expenditures out. Of the beast, that is. I wasn’t making a partisan point, but will note anyway that in the relevant period the Dems didn’t control Congress.

John Thurow
Sep 1 2012 at 2:29am

I am surprised that there was no mention in the comments or podcast that right after the democrats attained the majority in the House, Senate and the Presidency in 2008 one of the first things they did was to raise the minimum wage by 2+ dollars over a period of time. It doesn’t seam like that hard of a problem to figure out how long it would take due to inflation etc until the wages return to their pre 2008 equivalent and thus perhaps when employment would then reach the 2008 equivalent as well – that is, unless employers adjust by automation or other means to counter the legislation.

It is interesting also to note that in some European countries the minimum wage was increased around the same period of time.

If Lee Ohanian is correct this might go a long way to explain the slow recovery.

Ah, the Democratic Party economic brilliance overwhelms me.

Dr. Duru
Sep 7 2012 at 2:42am

Prof. Roberts,

You have repeatedly laid out the claim that the construction jobs that were lost in the recession are not coming back. However, since no big productivity gains are being made by builders, it stands to reason that those jobs WILL eventually come back once homebuilding rebounds…as it is starting to do now.

Article on the current SHORTAGE in labor in some homebuilding markets: http://www.cnbc.com/id/48926517

Russ Roberts
Sep 7 2012 at 9:59am

Dr. Duru,

I didn’t mean to imply they’re never coming back. They may come back eventually. Employment in April 2006 was 7.7 million. Over 6 years later and it’s still 2.2 million below that. I don’t know what those 2.2 million people are doing. Some have found other jobs. Some perhaps are waiting for construction to recover. My main point is that it’s a long wait.

The data are here. And this picture is from that data.


Chris J.
Sep 12 2012 at 3:12pm

Just listened to this, and realized that the point about Swedish home painters applied to my family very recently. We decided not to hire a nanny because my wife and I could care for our son ourselves, and the pre-tax income required to hire a good nanny (and pay the SS taxes on the other side) made hiring one much less attractive.

My wife is a doctor, and I own a small business. I suspect our society would be richer if she and I both did the jobs we specialize in. But our taxes are already so high (and going higher), that we decided to just enjoy our son. Its not just happening in Sweden.

Thanks for the great podcasts!

Comments are closed.


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Podcast Episode Highlights
0:36Intro. [Recording date: August 8, 2012.] Russ: Going to talk about the state of the economy, drawing on a paper you wrote in 2010 in the Journal of Economic Perspectives, "The Economic Crisis from a Neoclassical Perspective." We're also going to get to some current work you are doing on the housing market and the relationship between unemployment and the foreclosure issue. And along the way I suspect we'll dip into your work on the Great Depression as well. I want to start by asking you what is different about this recession relative to post-war recessions in the United States? What's strikingly different? Guest: There are several features of this particular episode that contrast sharply. Changes both in terms of the downturn up to the trough and then also about the recovery. So, in terms of the downturn, it's a very severe recession, comparable to the 1981-82 recession in which unemployment went up to nearly 11%. What's really different about this recession compared to 1981-82 or other severe recessions such as those in the 1970s, is that there's really no productivity decline. So, typically in U.S. business cycles, productivity, measured either as total factor productivity or labor productivity--output per hour or output per worker--typically falls significantly during substantial recessions such as those in the 1970s and the 1981-82 recession. In this recession, productivity didn't fall. All the drop in output was accounted for by a drop in labor input, or employment. So, that's unprecedented in terms of U.S. recessions. That also is unprecedented when you compare that to the Great Recession in other countries--Canada, the United Kingdom, France, Germany, Italy. All of those countries had severe recessions as well. Russ: Larger, I think, in your data--in your paper--in GDP terms. Guest: A little bit larger, yeah. The United States was down maybe around 7% relative to the usual 2% growth trend, and those other countries were down between maybe 7% and 9%. Those countries, the output drop was accounted for by both a large drop in productivity and a relatively small drop in employment. In the United States, it was all about employment. So, the Great Recession in the United States is different because it is all about employment. That's a very different relative to other U.S. business cycles and very different relative to the Great Recession in other advanced countries. Russ: Before we talk about what made this one different, let's talk about what makes all those other ones the same. If we looked at post-war recessions in the United States where output per hour, output per worker, declined as part of the GDP declined, why would that happen? What's going on typically in those recessions? And then let's talk about maybe why it didn't happen with this one. What's going on there? I mean, people didn't forget stuff. When they hear, productivity is lower, they think well, people weren't as productive. What did they, forget how to work the machines? What are the data capturing, as best as we can tell, in those so-called typical recessions? Guest: Right. So, the 1970s recession, the 1981-82 recession, recessions in the 1950s and 1960s where productivity declined a lot in the United States, that was really the feature that motivated Finn Kydland and Edward Prescott to write, to start the real business cycle literature. Which was part of the reason that Kydland and Prescott both received the Nobel Prize in 2004. So, what's kind of compelling in an intellectual way about that real business cycle research program is that there's still not a canonical explanation for why productivity declines during recessions. There's a lot of theories on the table, but there's no accepted explanation for that. Some theories are: Recessions are periods of changes in business lines and products and this leads to temporary changes in output per worker. Another theory is that monetary policy or financial intermediation doesn't work quite as efficiently as it typically does and this impedes the ability to allocate resources in the most productive organizations. So, those are two theories that are on the table, but we are very far from a well-accepted explanation for cyclical changes in productivity. Russ: So, we don't have a good explanation, I suppose, for why this one's not the way it is. Or different. Guest: No. This recession at some level--so Prescott will argue that the current standard measures of productivity which is GDP divided by the number of workers, is flawed because intangible investment is not well measured in the GDP accounts; and intangible investment--the type of intellectual capital done at high Research and Development (R&D) firms--we're sitting here at Stanford, so you've got Yahoo and Google and a bunch of IT companies down the road. That those types of intangible investments fall a lot, and that's not well captured. Russ: So, when times are good, we sit around with each other and get smarter, chatting in non-measurable ways; and when there's a recession, when times are bad, people hunker down and don't do as much of that stuff. That's the claim? Guest: Yeah. And what Prescott will point to is the idea that you look at the market value of organizations on the stock market; and the value of the physical capital stock, particularly for fast-growing companies that do a lot of R&D, physical capital can only account for a tiny fraction of the market value. And therefore he'll conclude the value of the value of intangible capital is accounting for the rest, and we see large declines in the value of intangible capital during downturns. So that's what he'll point to. Russ: And the U.S. economy today, more knowledge-based, less tangible generally, so therefore it's possible that this would be confounding, the measurement problem is confounding what we're observing. Guest: Yeah. The very nature of the word "intangible" makes it hard to get your arms around, but I think there's some good reasons that might be playing a role. Certainly it's hard to quantify the relative effect of that. Russ: Dark matter in economics. Guest: Yeah, exactly.
7:45Russ: Now one of the things that's a striking chart in your paper, it just looks at per capita hours worked in the United States over time; and two things are striking about it. The first is the one you focus on, which is the drop during this recession is enormous. We've got the paper here in front of us--we are doing this podcast face to face. So, between the peak in roughly 2007 when the recession starts, to the drop--this paper was written in 2010 so you go through the middle of 2008. Just over that very short period it drops from about 360-something hours--is this per year? Guest: This is per capita. Russ: Per population, not per worker? Guest: Yeah. This is per adult population, so the working-age population. Russ: Okay. So, 368, say, to 335. It's a 10% drop. Guest: Yeah, a 10% drop. Russ: It's huge. The other thing that struck me about it, when I'm looking at these data--the series starts in 1956. Between 1956 and 1980 it bounces around. It goes up in good times, it goes down in recessions when people are being laid off, obviously. And we don't know whether the hours worked are low because people don't want to work or can't find work. But one thing that's striking about it is between the 1981 recession, so around 1983, to 2000, right before the 2001 recession, so that's about a 17-year period, often called the Great Moderation, during that period hours work--I'm guessing off the vertical axis--but they go about from about 315 to about 380, which is a 20% increase in per capita hours worked. So that's obviously an increase in labor force participation, more hours worked for those who are working--everything is just humming along. But that growth is huge. Guest: Yeah. Russ: That's a huge part of the expansion in economic activity over that period, suggesting it's not so much, it's not productivity; it's just more resources put into the economy. Guest: The 1980s-- Russ: and 1990s-- Guest: Yeah, the 1980s and 1990s--probably when economic historians look back on the 20th century, the 1980s and 1990s will be called the Golden Age of Economic Performance in the United States. So, we had a severe recession in 1981 and 1982, roughly comparable to what we experienced in '08 and '09. Then, in contrast to today where we've had literally no recovery in jobs. Russ: Mediocre at best. Guest: Today, employment relative to the working-age population is lower now than at the height of the financial crisis in the fall of 2008, is higher now than at the NBER-defined trough of the recession in June of 2009. Russ: Say that again? Guest: So, employment today-- Russ: Lower today. I think you said higher. Guest: I'm sorry. So, employment today relative to the working age population is lower now than it was at the NBER-defined 2009 June trough, and it's lower today than it was at the height of the financial crisis when the stock market was falling 20%, everybody thought the world was coming to an end. Russ: So the world focuses on unemployment which is still quite high, 8.3% in the last data, but in many ways a more reliable estimate is people working, because there aren't as many measurement problems. There are other issues, of course. Guest: Exactly. You compare today's labor market with what happened in 1981-1982, it's just a remarkable take-off. A remarkable take off; a remarkable decline in unemployment. There's terrific economic growth that essentially was, with the exception of the 1981-1982 recession-- Russ: which was mild-- Guest: continued until a fairly mild recession in 2000-2001. And what concerns me somewhat--one can look at the comparison between the 1980s and 1990s versus the last decade in a couple of different ways. And the way you look at that really colors your vision for the future performance of the U.S. economy and really living standards. One is that we are in a slump now; that we can debate about what should be done to correct that slump and get back on track. Another vision is very different, which is: Before the 2008-2009 recession, so 2002-2007, which came out of that mild recession we just talked about, we didn't have economic performance during those "expansion" years nearly as good as we had in the 1980s and in the 1990s. So, job creation, business startups, and what I'd like to look at is job-creation at small, fast-growing firms. We know that General Motors (GM) is not going to be the big jobs creator. Unless somehow China falls in love with GM products. Maybe they will. Hopefully they will. Russ: Or GM discovers some new technology that we don't know about. But it's not the Chevy Volt, as far as we can tell. Guest: Typically those big companies are not the big job creators. The big job creators are the small companies that then take off. Job creation at those small startups is way, way down. Not just today, but if you look at 2002, 2003, 2004, through 2007, it's not nearly as vibrant an economy during those expansion years as it was during the 1980s and the 1990s. When I look at that data from a long run perspective I'm much more concerned about the future of the U.S. economy than simply saying: We still haven't quite gotten it right from the most recent recession. Russ: I assume you are saying that because it suggests there are some structural issues that this recession might be masking; that it's not just the recession. There's other stuff going on that's making things not so great. Guest: Yeah. Earlier you asked me what was really different about our current episode. And the recovery now really jumps out. So, you asked me about this paper I wrote for the JEP a couple of years ago. It was a really interesting project. Chad Jones, the Editor of the JEP-- Russ: That's the Journal of Economic Perspectives-- Guest: Asked me if I'd be willing to write something, and I kind of specialize in economic crises, so I said, sure, this sounds fun. So there was a symposium in the JEP, Bob Hall, Mike Woodford, Ricardo Caballero, and I think David Laibson were the other papers in there. They were all very different. Russ: No doubt. Guest: For listeners, all of them are really interesting reads. But when I wrote that, the conclusion I reached was it's not so much about a financial crisis. It's more about labor market issues. Or, if you want to think about financial crisis, it's: Why does that impact labor markets so much? Russ: Which is not obvious. Guest: Yeah. And I wrote that about two years ago. And the labor market looks the same today, or perhaps even worse than when I wrote this first two years ago. Which is really disturbing. So, it's really unprecedented to have literally no return to normal employment levels. As I mentioned, employment in the population today is lower than it was in June 2009 when the NBER defined the trough. Russ: That's the start of the recovery. Guest: Yeah.Russ: Officially. Guest: So, you look at that performance and that's not only abysmal, but it's unprecedented. I know we'll talk about the Great Depression a little bit later, but even in the Great Depression recovery you had at least some job recovery. In this one, you are not seeing any at all.
16:03Russ: So, the other--there's a bunch of things to talk about, but one is, we never really talked about this explosion and the reasons for this explosion in labor market activity, post-1981, 1982 recession. I assume--I'm not very familiar--that's a polite way of saying I'm unfamiliar--with Prescott and Kydland's work other than to know that they put a lot of stock in marginal tax rates falling or rising. So they explain large differences in Europe--I know Prescott explains large differences between Europe and the U.S. working hours not because the French like long times in cafes sipping wine but because they have a different return incentive from working because they have higher marginal tax rates. Is that the standard story for this long secular rise between say 1983 and 2000 in hours worked per capita--that it was a time in the United States at least in the first part when marginal tax rates were falling? What's going on there. What do we know? Guest: Great question. So, you mention the research that Prescott did about tax rates. So, I did some research on that with Richard Rogerson at Princeton, Andrea Raffo from UCLA--a Ph.D. student who is now an economist at the Federal Reserve Board. And what we did was we expanded Prescott's idea substantially, both over time and across countries. So, we looked at how much can changes or differences in marginal tax rates that affect individuals' time allocation decisions. So, you just talked about the incentive to work. So, the incentive to work depends upon the return to working relative to the value of one's time in non-market activities. And there's enormous dispersion in those tax rates that affect that return to work across countries. And we had pretty good data from the Organisation for Economic Co-operation and Development (OECD), and what we found was striking. So in the 1950s and 1960s, total hours worked in a country relative to the working age population--so that's become the standard measure that a lot of economists use--was higher in Germany, in France, and some of the Northern European countries relative to the United States. It's now on average about 20-25% below what the U.S. level of work is. And we found that a big chunk of that could be accounted for differences in marginal tax rates. And in particular you look at countries like Germany, France, some of the Northern European countries and you see negative lock-step movements with higher marginal tax rates, large drops in hours worked. Russ: I just want to put a footnote to that. Large drops in hours worked in taxable activities. Not necessarily true that people are sitting around in the cafes. A lot of them are doing what we call uncovered work, or work in the black market. Cash. Guest: Absolutely. Yeah. There's non-reported transactions and there's probably more of what economists call home production in those countries. Russ: We call it home production but a lot of the time it's work. It could be you are fixing your own house instead of working and hiring someone to do it. But it also is sometimes you are paying your neighbor to do it and you are giving him something in return that is nontaxable. Guest: Yeah, absolutely. Russ: You are painting his house and he's paving your driveway. Guest: Absolutely. So just as a sidebar, I visited the Swedish Central Bank a few times and I remember having lunch with one of their economists, and he said: Do you know why we don't have a home painting industry in Sweden? And he said: One of my colleagues estimated how much I would have to earn in order to pay a painter $1 after taxes. So, the Reader's Digest version is: marginal tax rates are so high that one would have to earn something like $18 or $19 if their painter was to receive $1 after taxes. So, the homeowner is going to be taxed once, and then the home painter is going to be taxed. So: we all paint our own houses because it's way too expensive. Russ: Not worth it. Guest: So your point about market-recorded activities is absolutely correct. Russ: I mention that just because I think our ability to precisely estimate traditional labor supply elasticities, that is, how much people respond to incentives, and I think armchair theorizing, when you think about how much you'd respond--it's not always obvious to me that the effect is as large as some claim. But when you include this kind of effect, especially at very high rates, I think you start to get large responses. Guest: Right. What convinced us that there's significant merit in this particular theory was there are really kind of two pieces that come out in that study--I believe it was published in the Journal of Monetary Economics in 2006. One is that some of the European countries did some reforms. So, in the late 1980s and early 1990s some countries reduced marginal tax rates. Not to levels commensurate with the United States, but they did reduce them fairly significantly. And what you do see is you start seeing increases in market hours of work in those countries, where you do see the reforms. The second is that we fit a number of regressions of trying to account for how much taxes could account for this factor compared to a host of other labor market indicators that economists often point to as depressing European hours of work, such as level of unionization, the extent to which it's centralized, employment protection legislation. What was pretty striking was that the R-squared in the simple regression that includes only the tax factor is almost the same if you add in any one or two or the entire kitchen sink of all those other variables. The coefficient doesn't change in terms of magnitude and the t-statistic doesn't change as well. Russ: So, the R-squared is the proportion of the variation explained with just one variable and the t-statistic is how significant it is. Guest: Yeah. Sorry about that. I got excited there and lapsed into the-- Russ: That's okay. Guest: So, in terms of the 1980s I think that was a large factor. There were large changes in taxes in the United States in the 1980s and I do think that was an important factor in what you might call the U.S. Economic Renaissance, from pretty abysmal decade of the 1970s. And it was also the case that that was the birth time roughly when information technology really started to take off. It was the 1980s. And you also mention the 1990s. Then we get the internet boom and venture capital funding, some of the incredibly successful companies that are sitting around here at Stanford. So, I think those two factors played an important role in the 1980s and 1990s. Russ: Of course, hours worked per capita rose pretty significantly in the 1990s as well as the 1980s. And we raised taxes at the beginning of that period, I think. And in the middle. So, there's got to be other things going on there.
24:00Russ: Now the other thing--I want to come back to the labor market again, but before I do I just want to hear you talk about one other factor that struck me as dramatic, looking at your summary of this particular recession, which is business investment. The decrease in business investment in this recession relative to other recessions is quite large. Is that correct? Guest: Yes. Russ: Any thoughts on that? And it hasn't recovered very well, is my impression. Guest: No, it hasn't. It hasn't recovered that much. And this is a little bit like the 1930s. One parallel is investment during the 1930s was, even during the recovery, was still 50-60% below trend. Just remarkable. Russ: In the 1930s. Guest: In the 1930s. Here we are nowhere close to that, but again, we're nowhere back close to trend. So, what's interesting about today's economy in terms of the corporate sector, in terms of what they are doing with investment, plant and equipment, and with decisions they are making towards hiring new workers is that those companies, their cash positions, their liquid asset positions are at least back to where they were before the financial crisis. Russ: A lot of profits. Profits are high, a lot of cash on hand, a lot of successful companies are sitting on money, not doing anything with it. Guest: They have tons of cash. And not only in the non-financial sector, but financial sector profits, which were negative at the height of the financial crisis, those are back to where they were before. Part of it is because my tax dollars, your tax dollars, went to subsidize them. Russ: We made our contribution. Guest: We made our contribution. Russ: Good to see them back on their feet. Guest: We're waiting for those dividends. Russ: Yeah. As they say, don't hold your breath. So, why is that? Again, a big puzzle. Why aren't businesses investing more? They've got the wherewithal. They have cash. They have plenty of money. Some people have suggested: Well, they've run out of good things to do with the money. I find that hard to believe. They have, in some dimension. They are not using it. Is that because they can't think of anything? I tend to be sympathetic to the idea that they're anxious about the future, and they're waiting on the sidelines to see what's going to happen. Guest: Yeah. So, the statement that they've run out of things to do with their cash, in some sense that's a tautology. Russ: Right. It's not informative. Guest: Bad times are always times by definition where there's not a lot of good investment opportunities. So the question is: Why are there bad times? And I think there's probably--in my view there are two theories. Russ: Hold that thought. I want to come to that in one second; that's what I want to turn to next is those two theories. But before you do I want to ask you one other thing about the labor market that struck me. We had a conversation yesterday before this interview, something I noticed as well, which is: in every recession, higher-educated people are hit less hard than lower-educated people. It's pretty dramatic in this recession, though. Among college educated workers, unemployment is higher than it was in the best of times, in 2006, say. But for low-skilled people, low-educated people, people with a high school degree or who didn't finish high school, it's devastatingly bad. Which is why, again, we're doing this interview in Stanford, CA, Stanford campus, you can walk a quarter of a mile from here to the Stanford Mall, which is on El Camino at the intersection of Palo Alto, Menlo Park, and you'd think you were in the flushest economic times ever. This area, which is high education, has tremendous economic health right now. I live in the Washington, D.C. area when I'm not here, the rest of the year, and of course its main industry is government. It looks flush and normal; and of course it's a very high-education area, the nation's capital. Places that have lower education have struggled terribly and are doing much, much worse than the national average. What do we know about that? What's going on there? Guest: I mean, I think you hit the nail on the head. And part of the solution to, long run vision of the U.S. economy is dealing with the fact that highly educated people, they have on average remarkably good looking futures and those with low levels of education--I mean, I hate to say the word--are doomed, but I think a lot of them are. But you hit the nail on the head with that, so, one can obtain data on unemployment rates by age, by education level, by various types of demographic and socioeconomic factors, and the data just jump out at you. So, you mentioned unemployment rates among those with, say, college completion or advanced degree--so around 5% unemployment. Russ: 4 point something. Guest: Maybe up from 2%. Russ: So it's doubled, but it's from a very small number. Guest: Yes, from a very small base. And when you look at those individuals with the lowest levels of education, those who haven't finished high school, it's a disaster. Because their labor force participation rate is about 20 percentage points lower than it is for highly educated people, so their labor force participation rate is somewhere around 68, 67%, so not that many compared to other groups are working or looking for a job; and those who are in the labor force, their employment rate is 15, 18, might even be as high as 20% at some point in the last couple of years. And those who are working have wage rates that are incredibly low. I looked at some data about the median wage--the wage of the median unemployed person. And in 2005 dollars, their previous wage is somewhere around $13 per hour. Russ: You are saying before they were unemployed. Guest: Before they were unemployed. Now we know from a lot of research, some of which goes back to 20 years, by Jacobson, Lalonde, and Sullivan, which was a 1993, American Economic Review paper, and then very recent work by Steve Davis of Chicago and Till von Wachter, that individuals who suffer job loss during a period of severe recession take enormous wage cuts when they ultimately do find a new job. So, you're somebody earning $13 an hour, and the fact that on average you are going to take a big wage cut, means you are bumping up against minimum wage legislation. Russ: Which is why--we had a previous interview with David Autor out of MIT on the growth in disability rolls. Tremendous growth. Guest: Huge. Russ: Some of those folks, they are disabled not in the way we traditionally think of disabled. They are struggling to find work; they find a doctor who will say they've got something that makes it hard for them. Guest: Absolutely. So when you sort of say: Why is it different now than in the past? The theory that I think has some merit for this is the fact that highly educated people can make very productive use of new, cheap, sophisticated capital equipment such as information technologies. So, you give a college graduate, fax machines and cell phones and personal computers with advanced software--it makes them incredibly productive. A lot of those machines and technologies are taking the place of-- Russ: lower skilled-- Guest: Yeah. My favorite story for this is you look at say the ports of New York and New Jersey. In 1950, I think about roughly 10,000 guys--longshoremen. Big strong guys. Guys with strong backs worked there. Pick up a box, put it on the ship; take a box and take it off the ship. That was the technology for offloading. Russ: Today any person touches anything, except who operates the crane. Guest: Yeah. Russ: Forklift. Guest: Today, I think about maybe under 1000 people. So there's been a drop of a factor of 10 drop in employment. They are all college grads operating--you drive past any port and you see these remarkable cranes that are picking up these large containers. These union guys, the 6'1", 250 pound guys who could pick up anything, they are not around any more. Unskilled labor lost that job to capital goods. Russ: And that guy is moving a piano for his neighbor in a moving company and it doesn't pay what it used to pay. Guest: It doesn't pay nearly what it used to pay. So this process of cheaper, better capital competing with low skilled labor has been going on for a long time, now.
33:29Russ: We're off what we were talking about, but that's okay because I think it's very interesting. I think normally in economics we say: That's creative destruction. We find a more effective way to unload the ships; that way, it's cheaper to unload the ships; that way there are more ships and the things that come off the ships don't have to be as expensive. And resources are freed up elsewhere in the economy. And that's usually a glorious thing for our standard of living, for the average person. I think the challenge is, some of those low-skilled people, they are not tooled up to take advantage of the new opportunities. Guest: That's exactly right. A lot of those people are not competitive in today's labor market. Russ: So the part I think about more than what you are saying is sectoral specific. So, I look at construction and manufacturing. I think you are talking about manufacturing to a large extent. There's a long trend, 60, 70 years old or longer, where machines have replaced workers, the number of workers necessary to build a car is a fraction of what it is. So even if GM were thriving, it wouldn't have 750,000 employees. It just doesn't need the number of people it used to have. That's true of all kinds of manufacturing. But that trend started in probably 1945, and it just keeps going, and we did fine as an economy. The average person did fine. And the low-skilled worker did fine. New opportunities opened up elsewhere to do other activities that now are done by machines. But in construction, we had this massive boom, artificially stimulated I believe by government housing policy; and as a result, in areas where it was easy to expand--so-called sand states, Nevada, Arizona, western California, huge increases in the number of workers. And those jobs have not come back for 5 years. More. And those workers who were laying drywall and building houses, they are not working on the stimulus package-highway thing. Because they don't know how to drive those machines. People think they are somehow going to be stimulated by this. They are not. And that housing sector alone is a huge chunk of low-skilled employment. So, it's not maybe as bleak as you think. It's still bleak. But the sickness of the housing market has made it harder for this recovery to look like other recoveries and made it harder for those people who were drawn into those sectors and now can't find anything else. Or who are waiting. As a carpenter, they want to make that whatever-it-was per hour job and it isn't coming back again. But they are sitting there waiting. Guest: I think there is a substantial component of workers that are in that position. The guy was making $25 an hour-- Russ: Could take a $15 job. Guest: Yeah. Russ: But they don't. They are waiting, hoping. They take Unemployment--which is not very generous, by the way. Guest: No. And it steps down over time. So, this is different from this particular period in that we did have the construction boom; we have all those houses sitting in Nevada now, maybe they'll get populated at some point. Who knows. But that did provide employment opportunities for a lot of people that were relatively low skilled. Russ: And new housing construction is not bouncing back because of that big overhang of both unfilled houses and houses that are being foreclosed on. Guest: No, exactly.
37:03Russ: So, let's get to the cause of this malaise. As you started to say, there are two stylized explanations for why this recovery is so mediocre. One is that? Guest: So, one is that there is a lot of uncertainty about economic policy and that's holding back businesses from investing and from hiring workers. That's an interesting theory; from the standpoint of economics, any activity where there's a large fixed cost associated with the decisions--and there certainly big fixed costs associated with building a new factory or office building; and there are fixed costs associated with hiring a worker. You've got to train them, bring them on board, integrate them into the organization. Both of those decisions have big fixed costs. Russ: Fixed, meaning you hire them for 6 weeks, 6 years, there's still a big up-front cost. Guest: You've still got to pay that up front cost, exactly. Sort of recent theoretical work has emphasized how uncertainty about the future leads those decision makers that face those up front costs to delay their decisions until there's a little bit more clarity. So, that theory says: You know what? We've got this dysfunctional Congress and we don't know if there's going to be, if taxes are going to go up next year to the extent they are prescribed to or if there's going to be a deal in Congress. We don't know who is going to be in the White House. Republicans and Democrats can't seem to make any decisions. Who knows what it's going to be looking like in terms of 2013? Russ: We have large sectors of the economy under new legislation where the legislation isn't even completed--that would be health care and the financial sector. Guest: Sure. Dodd-Frank is far from done. Russ: Unspecified. Guest: Yeah; some parts haven't even been touched. It's a remarkably complex piece of legislation. Russ: So, I'm sympathetic to that argument, but I think there are some problems about it. We'll talk about it in a second. First, let's get to the second claim. Guest: The second is more ominous, and we talked about that a bit before, which is: The United States is not as vibrant as a long-run economy as it was in the 1980s and the 1990s, and that low investment rates reflect--low investment rates are often times a very good predictor of future economic activity, because investment is done with the anticipation of what it will yield in the future. And again, going back to the analogy with the Great Depression, massive collapse. There's a 90% drop in investment between 1932 and 1933. It didn't come back really much at all in those recovery years. And my sense is that it didn't come back because businesses looked to the future and said: The long run is not looking very good for this economy. I worry that some of that may be playing a role again today, and the data that leads me to think that might be somewhat of the explanation is that the expansion years, between the 2000-2001 recession and the Great Recession, those are not particularly good years compared to the 1990s and 1980s. So, we seem to have a more sclerotic economy. Russ: So, the first explanation is sort of bad policy, blundering by policy makers. The second is: there are some structural problems we need to deal with. But there's a third explanation, which I thought was going to be your second, which is: What's unique about this crisis and recovery is that it was driven possibly--this is not even clear either--but it's been driven by a financial crisis. That the banking sector, the shadow banking sector's collapse is why this has been such a mediocre recovery. And that's generally what happens after these kind of situations. The Great Depression being an example. We had a terrible collapse in the banking sector in the 1930s, says the argument; lots of bank failures, lots of bad financial help, and that means the recovery is not going to be very good. People made the same argument for this particular recovery. So, among those three--bad policy, structural problems, and a financial crisis--where do you fall and what do you think is the most important? Guest: I put stock on sort of bad policy/policy uncertainty as we go forward. Certainly when you look at the American Recovery and Reinvestment Act, which is more popularly known as the Stimulus Plan, it's hard to make the case that it did very much. Unless your vision of the world was going to be 15% unemployment. Or 18% unemployment. You look at Cash for Clunkers--it seems like it was just a lot of sales from the future. You look at the Homebuyer's Tax Credit--it didn't do much to help the housing market. But those were all incredibly expensive policies that helped us rack up a lot of debt. So, you think about bad policies, yes, I think that played a major role in why we haven't had too much recovery. I don't subscribe too much to the slow recovery because of financial crisis. That makes me quite different from a lot of economists.
42:33Russ: Why not? You have some interesting evidence. It's tough--obviously we are in what Jim Manzi calls high causal density: there's a lot of things going on at once and there's a temptation to cherry-pick the causes you like and discount the causes you don't like. But you do provide some evidence for the financial sector not being as important as some people claim. What's your argument? Guest: So many people now cite--we have a labor recovery now because of the financial crisis and they'll point to work by Ken Rogoff and Carmen Reinhart. Russ: We interviewed Carmen on this program. Guest: Terrific. So, the United States doesn't look like those crises. And here's why I say that. So, I'm doing work now with a former Ph.D. student of mine, Giang Ho [?], who is now at the International Monetary Fund, and Ellen McGrattan at the Minneapolis Fed; and we are looking at a number of recoveries following financial crises. And yes, GDP recovery is delayed. But it's not because of employment. Employment comes back. What doesn't come back is productivity. So, we can always just arithmetically decompose changes in output identically into two pieces--output per worker and the change in the number of workers. That's an identity. In a lot of the Rogoff-Reinhart episodes--they're fairly recent ones, not ones that go back into the early 1900s, 1800s--the delayed recovery is because of productivity. It's not because of employment. We're the exact opposite. We're not having a delayed recovery in productivity. Worker productivity is higher than it's ever been. By a substantial margin. We're having a delayed recovery because the labor market isn't coming back. So that's one reason my view is that that's not what's going on here. And then the other reason is, you know, we talked about before, the corporate sector is largely self-financing. They have tons of cash. Russ: So, they don't need the financing. It's not like they their local banker is gone so they can't finance their new plant or new activity. You are saying they don't need their local banker like they used to. Guest: They don't need their local banker like they used to. They are not up against some borrowing constraint where they are saying: If only I could get a bank loan to undertake this great project over here. Russ: But aren't there people who say that the commercial paper market collapsed, that you couldn't get short term loans; that firms couldn't get liquidity in the aftermath of the crisis? We're talking about the 2008-2009 period, that the money market was in a shambles, the government needed to step in. There's a lot--it seems to me some evidence at least that there were financial challenges. Guest: Sure. There were tremendous financial dislocations in the fall of 2008. And I don't downplay those dislocations on the economy at that time. And my own sense is some government handling of the crisis could have been done better. Now they were operating at a time-- Russ: Are you sure? Guest: So, it was a difficult situation. But what you see after this crisis is--some interest rates shot up like crazy in the fall of 2008. They came down pretty quickly in the spring of 2009. Now, we're almost 3 and a half years past the spring of 2009. Russ: It's true. Guest: A lot of the markets that kind of dried up--again, we mentioned earlier about the difficulties of inferring cause and effect. The Fed stepped in substantially and basically took over activity in some of those markets. Russ: Yes, they did. Guest: So, when you look at bank lending today, it's lower than it was at the height of the financial crisis. Russ: Why? Guest: So, again, my sense is there is just not a lot of demand for loans out there. Russ: Right. I agree with that. But then the question is why. And we don't really know. Guest: Then we go back-- Russ: Because things are bad. Why are they bad? Guest: We go back to those explanations of is it uncertain policy, is it--?
46:49Russ: Well, let's talk about uncertain policy. I'm sympathetic to that. But as many people wisely point out on the other side, there's always uncertainty. First of all, tax policy. Tax policy is changing all the time. It's not a secret that we are spending more than we take in. It's true we've spent a lot more than we take in; but there's not that much uncertainty. Taxes are going to have to go up. Some aspects of taxes are going to have to increase, because you can't run a trillion dollar deficit every single year; and either we are going to spend less or tax more. But eventually we are going to have to tax some more, because I don't think we are going to be very good at spending less. Let's talk about the Great Depression as well, because you've made the claim, and we've had Bob Higgs on, whose work I respect, talking about policy uncertainty discouraging investment in the future. So, it sounds nice, but hey, it's always uncertain. Why, other than the fact that it coincides with our view of government not being a very effective steerer of the economy, how do we know this is really discouraging things? Guest: Yeah. All those are good points. What I see that is unique about this particular episode is that we haven't had a 70% publicly-held debt-to-GDP ratio before, which really highlights the importance of fiscal imbalances. Politicians in the past, whether Republican or Democrat or anything else, were able to successfully kick the can forward on a lot of entitlement issues. Russ: We're getting close to the wall, where you can't kick it any further down the road. Guest: So, now we're close to the wall. So now voters are finally saying: Oh, now I see. And of course there's really nothing new about a lot of these issues. Unfunded pension liabilities, particularly in the government sector--that's been around forever. Forever, meaning 30 years. So there are some novel features of today's economy, including a Congress that can't seem to work together at all. Including a big new health care program that we've never really had before. In the sense of what that means for the future and how that's going to impact businesses. Businesses are going to say: Okay, am I going to offer it? Am I going to pay the tax? The businesses that I talk to still are pretty uncertain about how it's going to impact them. We mentioned Dodd-Frank a couple of minutes ago, which is a behemoth. One that I'm not particularly positively disposed towards. We still, in my opinion, too big to fail is sort of cemented in by Dodd-Frank. Russ: Well, that's the biggest problem. Guest: So, I do think there's some issues in today's economy that do raise more uncertainty than in the past. And it's really hard to distinguish between: Are businesses holding back on investing in plant and equipment and hiring workers because they are uncertain about what's going to come next year, or that they just don't think, no matter who is in the White House or who is in Congress, we're not going to have nearly as good an economy as we had, say, in the 1980s and 1990s. It's really hard to distinguish between those two. Russ: That's a great point. I think they tend to get lumped together. It could be that people aren't so uncertain about the future. They could think it's a bad future. Unfortunately. Guest: That's what I'm worried about. And really worried from the standpoint of--we were talking about the labor market a minute ago--really young workers. And workers that aren't competitive in today's job market, given their limited education. Russ: Certainly a long run challenge. Our education system--it doesn't need a reform. It needs something else. Guest: A do-over. Russ: Reform is misleading, as if there's a switch and we just have to flick the right switch. Guest: There's some modest changes to be made. Russ: Right. I think we need some radical restructuring. We've talked on this program about the STEM phenomenon--I think it was Alex Tabarrok--the science, technology, engineering, and math. That's always going to be a smallish portion of college graduates. And so saying: We just need more STEM graduates so they can be part of the modern economy, is not the right answer. Also, I just had an interesting conversation with Adam Davidson from Planet Money about some of the revolution going on in manufacturing. There's a lot of high skilled work being done in manufacturing that requires calculus. It's fascinating, that revolution, as well. It's unseen. I don't think most of us are paying that much attention to it. But, we need--it would be nice if there were more creativity in the education sector to allow people to find ways to get skills they can be productive with.
51:57Russ: I want to ask you a little more about the Great Depression. You've written some very interesting things about that. Then we're going to turn to the last part of this, on the housing market. We don't measure uncertainty. It's not like: If it went from 6.3 to 7.7, that explains it. So, I'm sympathetic to the argument that health care and other transformations have created more uncertainty, or maybe worse, created perceptions of a bad future. I think the other side would argue, people who favor that would argue, no, it's improved your health care situation and that's a crucial part of productivity. So, I think there are arguments on the other side. But let's move to the Great Depression. The standard Keynesian view is: Well, we just had a loss in Aggregate Demand; the war came and government spent like crazy; we didn't recover. You tell a very, very different story that must cause you to be very unwelcome at a lot of cocktail parties. So, lay out a little bit of that case for why the policy environment of the Great Depression extended it and why it was not the aggregate demand problem that many people argue. Guest: Sure. The Great Depression is fascinating. It's unprecedented in duration. It's unprecedented in depth. People talk about today's dire economic situation. Russ: Nothing close. Guest: You are talking about unemployment rates of 20%. Russ: 25%. Guest: Investment that was 90% below trend level. Just remarkable times. The reason I study economics is that my dad grew up during the Great Depression, so whenever my grandparents were over at the house, that's all I heard. The 1960s, 1970s, I heard people, adults still talking about what happened 30 years before. Russ: My dad doesn't invest in the stock market. Because it's dangerous. He invested in junk bonds. Which are dangerous. To him, though, it's not the stock market. Guest: My dad must have talked to your dad, because he never invested in the stock market. T-bills are great. So, any theory of the Great Depression has to say why it didn't happen before and why it didn't happen afterwards. And why did it take 10 years to get anywhere back to close to trend. Something must have been fundamentally different. And I think a lot of data had not been explored very systematically, just from the standpoint of economics. In fact, when I first went to teach at the U. of Minnesota, Ed Prescott was a colleague of mine there; he would win the Nobel Prize a few years after that; and I would say: Ed, what do we know about the Great Depression? And he would say: We know nothing. We need a whole different economic theory to understand the Great Depression. And I'd wanted to do a dissertation on the Great Depression when I was at grad school at the U. of Rochester, and my professor at the time, Bob King--you probably know him--and Alan Stockman said: Don't do that. Don't even think about doing that. We think you can do okay, but don't go there. No Ph.D. student should write about the Great Depression. So, when I got to Minnesota I started thinking about this, and my colleague Hal Cole was at the Minneapolis Fed, and we started talking about it. And we said: Okay, let's just see what we can learn about it. And what was really unique is there was an unprecedented level of what we call cartelization policies, or non-market policies. That basically shut off competition. I mean, you and I know the market economy is when market forces work correctly, prices signal allocation of resources. And demand and supply come together so that there are no shortages and no excesses. And with the most part the U.S. economy looks not too far from that sort of free market vision for a lot of its history. Obviously markets don't work perfectly. There are some times when we have shortages, sometimes we have excesses. But there's a ton of evidence that market economies--not all markets, but a lot of markets--work pretty well to achieve that vision. In the United States it's to me glaringly obvious that that's not happening. You've got enormous unemployment for so long. These are people who want to work and they can't get jobs. So, what's different about the 1930s? Well, wages are incredibly high. Real wages, throughout the 1930s are above their normal levels and far above underlying productivity. So, when I try to explain this to people without a background in economics, I say: Imagine you are a worker, you are knocking on the door, and you are saying: Hey, I look like that guy in there doing that job. I'm willing to work for half of what he's working. So, economics is all about why don't those mutually advantageous trades take place. Russ: And that's a challenge to the Keynesian view, which says wages can't come down. For some reason, they are sticky. They look sticky, but they really aren't. Guest: There's something impeding that trade. And there's a bunch of evidence that says, no, wages aren't sticky from the perspective of kind of old-time Keynesian theorizing. There's a great paper in the Journal of Economic History by Chris Simon at Duke University. Back in the day, the New York Times used to post position wanted ads. So, people would take out an ad in the NY Times and say: I'm a male worker and this is my experience; I'm looking for this type of situation. Russ: Instead of help wanted, job wanted. Guest: Yeah. Situation wanted. So, before the Depression, the asking price of somebody saying, I'm looking for a job, here's what it will take to get me; the asking price in actual wages basically moved within a few percentage points of each other. During the Depression, that was off by a factor of 30%. Never before. Russ: 30% meaning? People are willing to work for-- Guest: 30% less than the wages being paid. So, again, we say: Why aren't those trades taking place? Well, something, almost by definition, is preventing wages from falling. And a lot of my research is focused on the policies of President Hoover, and also particularly President Roosevelt (FDR) in adopting policies that prevented wages from falling. So, Hoover had a meeting right after the stock market crash in October 1929 where he went to--Henry Ford was there, Pierre Dupont, Alfred Sloan of GM, U.S. Steel was there, Dow Chemical. And Hoover said: Look, your profits have been at record highs. I don't want this recession borne on the backs of workers. So, you don't cut wages. And in particular, if you could raise them, that would be great. Russ: So we can keep purchasing power high? Guest: Yeah, it was this old-fashioned idea of keeping purchasing power high. If the workers have high wages, they'll go out and spend it. There's sort of similar themes coming from some of the economic advice today. And Hoover said: If you do this, I will keep unions off your back. He said: Now remember, times have changed; the way you used to keep unions from forming, you can't do that stuff any more. Russ: Beat them up. Guest: You can't beat them up or show them a gun and chase them off the property. That world doesn't exist any more. And GM, U.S. Steel, Bethlehem, Dupont--they kept wages up. Henry Ford actually did a modest wage increase. He hadn't raised wages in a number of years. So, now as you start having some deflation, those fixed nominal wages are starting to become very expensive to employers. So, the work I've done suggests that about 60% of the decline of output and employment in the Great Depression can be accounted for by this Hoover high wage policy. And what's really interesting is the farm sector, which was about 25% of employment at that time--manufacturing was about 25% as well--wasn't hit by these kind of cartelization policies or wage fixing anti-competitive policies. Wages fell in the farm sector by a ton. Well, not by a ton, but they fell 25-30%. Real output in the farm sector and employment was basically unchanged in the Depression. So you have one major sector of the economy impacted by these noncompetitive policies not allowing the labor market to clear, and you have a huge drop in employment and a huge drop in output. You have another major sector of the economy where the labor market could clear; employment's at its normal level, output's at its normal level.
1:00:49Russ: You mentioned Hoover, and that example is sometimes what's called job owning. It's not legislation. It's an encouragement with some coercion behind it, promised coercion. What did Roosevelt do that was along those lines? Guest: He basically doubled down on that policy. So, Roosevelt put forward something called the National Industrial Recovery Act, the NIRA. Which, from the standpoint of today's economics would be incomprehensible. It basically said, Roosevelt said to industry: Most of the economy, we're going to let you collude and cartelize. So, GM, Ford, Chrysler, you guys get together; we want you to set minimum prices and we don't want you to sell below those prices. It's okay with us if you put quotas on new investment in plant and equipment. Or quotas on output. We want you to do that. What about the Sherman-Clayton Antitrust Acts that prevent this kind of activity? We're going to put those aside. Russ: Suspend them. Guest: We're going to suspend those. We'll let you do this as long as you maybe raise wages and engage in collective bargaining. So, it was wide-scale monopolization of U.S. industry on the product market side, and a huge increase in the relative price of labor. This was put in place in June of 1933--I think. When you look at the recovery, a lot of people will point to--including Christina Romer, who is a terrific economic historian at Berkeley and served on President Obama's Council of Economic Advisers (CEA). People will point to very rapid growth rates in output and say: Well, look at that recovery. All--80% of that growth was coming from productivity. Jobs weren't coming back. So, what Cole and I did was we measured hours worked per adult population during the recovery period. It wasn't all that much different than the recession. It's just that productivity came back in the 1930s. And we tie that to FDR's cartel policies. Towards the end of the 1930s, to FDR's credit, he gave this great speech where he said: Our economy has become like a concealed cartel system like in Europe. What he did at that point was he doubled the size of the Department of Justice (DOJ), their Antitrust Enforcement Unit. They started going after cartels. And labor--wages started to fall in a relative sense. Because during WWII--people will point to all this government spending during WWII stimulated the economy. Well, labor policy changed a lot. So, FDR met with unions, and he said: I want to make sure there's no strikes. And unions said: As long as we can collectively bargain, there won't be any strikes. He said: Great. Well, I think was either 1942 or 1943, Bethlehem Steel agreed to a large increase in wages with the Steel Workers Union. That wage agreement was struck down by the National War Labor Board. The National War Labor Board was put into place to essentially screen and ratify any kind of wage agreements, large scale labor agreements. And the War Labor Board said: Nope, this is inflationary; we are going to limit this wage increase to the cost of living. Unions were really upset and went to FDR and said: What are you going to do about this? You said we can collectively bargain. He said: Well, yeah, you can collectively bargain, but this is an independent board; this is outside, I can't get involved in this. And wages relative to productivity, which from the standpoint of the work that Cole and I did was kind of the key factor in determining how screwed up these policies are, wages relative to productivity was almost back to its 1929 level by say 1946, 1947. And then you come out of the war, and Taft-Hartley substantially changes the Wagner Act, which in 1935 had given workers and unions enormous bargaining power. So, it's a fascinating period. Cole and I are in the process of putting together a book about the U.S. economy from the 1920s through WWII with a focus on these kinds of policies. Russ: I look forward to talking to you about that when it comes out.
1:05:09Russ: So, let's come full circle. You argue then that in the 1930s there were productive exchanges between workers and employers that could have taken place if there weren't some artificial barriers. Are those barriers in place today? Why aren't wage rates falling to clear the U.S. labor market? Guest: So, great question. I think part of it is there are some workers, some compositional effects, where a lot of the workers that are not finding jobs are relatively low skilled, and those that are retaining jobs are high skilled. So it looks like compensation rates are not coming down that much. But part of that might be compositional. There's a lot of--well, these are some policies in place now that are changing incentives for job finding. Russ: Let's talk about that because it brings us to the last thing I want to talk about. You've written a very provocative, interesting paper on how the housing market has encouraged people to stay unemployed. So, talk about that. Possibly, anyway. Guest: So, I've written a couple of papers about--and they are purely positive papers rather than sort of welfare-based papers. Russ: Meaning the way the world works, not how you'd like it or how it should be. Guest: Exactly. So these are papers about how incentives for job finding and job incentive decisions have changed because of policies. And my most recent work on this relates to foreclosure delay. So, today, median time to foreclose on a home is around 15 months. So, once you enter the foreclosure process, the average person will get foreclosed on, median person, about 15 months. Russ: Long time. Guest: Long time. In the early 2000s, that was probably closer to 2 or 3 months. Russ: So you get an extra year to live in the house. Guest: Yeah. And the real simple idea is, if you are living in a house and you've stopped making payments and you are reasonably certain that you have a long time to stay in the home and continue not making payments, the incentives to engage in job search and when a job offer is received, you know, a person's reservation wage--a wage that they are willing to accept work or decline it--is very different than if you think the sheriff's going to come knocking on the door in the next month and say you and your family are out. Russ: Why? Guest: So, on the one case, if you know you can stay in your home a year or two years without making any house payments whatsoever--which is a big chunk of most people's family income--then the marginal value of the dollar is very different than if you have to pony up maybe 50% of your employment benefits [unemployment benefits?--Econlib Ed.] to stay in the home. And essentially living free is, so if you are thinking about engaging in job search you say: Okay, here's an offer. That offer's not that great. Should I take it? Well, I've got this free living situation, so I'm not really in that bad of a situation yet. It's very different when you say: I'm in the process of foreclosure. I know that the sheriff's going to knock on the door in a month; I better take this job. Russ: Because a month from now I'm going to have to be making a payment for rent. Guest: Either I have to get current on my mortgage or I'm going to be booted out, and I've got to make a minimal payment. Exactly. Russ: So, let's say your mortgage payment--I don't know what the median mortgage payment is in the United States, not that it's relevant; I really want to know what the-- Guest: It's about $700. Russ: I really want to know what the median mortgage payment is in Nevada, or Michigan, or these high unemployment states. But let's say it's $700. So you are saying I've got an implicit welfare payment I'm receiving--$8000, $9000 of a cushion I can fall back on because I'm living rent free. Guest: Yep. That's exactly right. Yeah. And this is, so this is a paper purely about how it changes the incentives. Russ: All on the worker's side. Guest: All on the worker's side, yeah. All about unemployed individuals who hold mortgages. And there's about 6 million people in the recent economy who are unemployed and hold mortgages. A record high. By a large margin. Russ: So, it's a clever argument. As a person who believes deeply in the power of incentives, the direction is correct. So, let's look at the skeptical side of this. So, I've been unemployed for 2 or 3 years, and I've been hanging onto my house, and all of a sudden I realize I can't make my house payment any more. But if I've been talking to my neighbors or looking in the Wall Street Journal I know that I've got a good year or so before they are going to throw me out. And I think now: I don't really have to find a job because I can live rent free for another year, and be unemployed now for three years? There are a lot of other factors that are going to dwarf that. My self-respect, what my spouse thinks of me, what I can talk with about with my neighbors. Your $8000 bucks--I'm going to turn down this job; I'll get another one in a year; a year from now I'll look? I'm scared about the future. I get a job offer and I'm not going to take it? Besides the argument that it's possibly true, what's the evidence that it actually is true? Guest: Yeah. So, what's pretty striking is we have evidence from the Panel Study of Income Dynamics (PSID), the Current Population Survey (CPS), that shows unemployment rates and also employment rates among individuals at different stages of delinquency. So, 30 days late, 60 days late, 90 days late, and into foreclosure. And what we see is that job acceptance decisions are very different once the foreclosure process starts than, say, 90 days late or 60 days late. So, it does appear that once people are thinking that the sheriff's going to be knocking on the door, job finding goes up. So, that's some evidence in favor of it. Russ: A parallel argument then is the extension of unemployment benefits has been a major factor. A lot of people find that hard to believe. Guest: Again, this is a basic incentives. So, the evidence we point to is that PSID and CPS data about job finding once foreclosure starts, we're also seeing it's--so we have those two sources of data. We're not saying this is the major reason why unemployment is 8% instead of 4%. We're finding this to be about at 1/2 a percentage point of unemployment. Which is significant but leaves a lot of room for other factors. Russ: It's not the problem. But it's part of the problem. Guest: Yeah. Russ: Let's close by talking about the future. I've got a feeling what you might say. But optimistic, pessimistic, going forward? It doesn't look so good. Cheerful news for me? Guest: Well, this is still the place to be. No matter how bad things look here, Europe is a lot worse. One reason maybe why we were so strong in the 1980s and 1990s is because we didn't face a lot of competition. We didn't have China developing the way it was; Latin America was a basket case in the 1980s. We are facing more competition now. The United States--there's no country more resilient than the United States. So, I'm always optimistic about the United States. But my optimism would be stronger if I saw Washington doing some more sensible things. And hope springs eternal. Hopefully, Washington will do some more sensible things in the coming years. Russ: No way of knowing.

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