Measuring Unemployment by Family

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New data from the Census Bureau show that the frequency of families without employment was sharply higher during the recession — but still fairly rare.

Many indicators of economic activity, like the poverty rate and consumer spending, are measured at the family level, but widely cited labor market statistics like the unemployment rate are measured at the level of individuals.

The unemployment rate, for example, is the fraction of people who are actively seeking work (or on layoff) and are not employed. It is the fraction of people working — not the fraction of families working — that is one of the primary indicators used by the National Bureau of Economic Research to declare a recession.

These standard personal labor market indicators are incomplete and potentially misleading, because they do not put labor market activity in a family context. Among other things, a majority of working-age adults live with a spouse and apparently share their income. More than 85 percent of people live in families.

Presumably, it’s less traumatic for a family to have one of its two employed members out of a job than to have all its employed members out of a job.

For these reasons, it would be interesting to know what percentage of families have somebody working, as opposed to the percentage of people who have a job. The two measures could be more or less the same if each family had at most one worker but could be quite different when many families have two or more people who could potentially work.

In a study that Yona Rubinstein of the London School of Economics and I did several yeears ago, we calculated such measures for the years 1965 to 2000. We focused on prime-age families -– that is, families headed by an adult (or adults) 25 to 54 and therefore not expected to be in school or retired (two activities that interfere with working). On average, all but 5 percent of people lived in a family with at least one person working (this includes one-person families). By comparison, almost 20 percent of prime-age adults were not employed.

In other words, it is much more common for a person to be without a job than for a family to be without a job.

As Catherine Rampell wrote in a post on Economix on Monday, the Census Bureau has released family employment statistics through 2010. The Census statistics are a bit different from those I cite above, because they include households headed by retirees and exclude people who live by themselves.

Not surprisingly, Professor Rubinstein and I found that the family nonemployment rate increased during recessions, like those of the early 1980s and of the early 1990s. The nonemployment rate increased by almost a third during those recessions, although even at their peak nonemployment was rare for families.

The latest Census Bureau release includes the most recent recession but needs some adjustment for its inclusion of retirement-age people. As a rough adjustment, I estimated the number of elderly people who live in families of more than one and the number of elderly people who live in families (of more than one) and have jobs.

The results are shown in the chart below (the Census Bureau technical notes and my paper explain why a more precise adjustment requires a lot more work).

The severity of this recession is obvious in the data, with the series reaching new highs in 2010. Still, it is relatively uncommon for a family to have nobody who is either working or retired.

Same Analysis for Iraq

Today I wrote that Allied efforts in Libya are unlikely to bring democracy.

Iraq's situation is not much different. Tsui and I wrote in 2006:

Regime challengers are twice encouraged in Iraq – once by the expected future value of leadership and a second time by political freedoms. Perhaps attempts to grab power in Iraq would have been less intense if the country’s oil assets had not gained so much value since 2003, or entry into the Iraqi political process were as difficult as in neighboring nondemocratic countries.

Don't Hope for Change in Libya

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Even as the United States and its allies press their military campaign against forces loyal to the longtime dictator Muammar el-Qaddafi, economic indicators suggest that helping Libyan rebels will neither reduce oppression nor result in democracy for Libya.

Libya’s oil reserves are among the largest and most valuable in the world, and that alone is a big obstacle to democracy. Leaders of oil-rich countries almost always enjoy rich economic rewards, and there’s an endless supply of factions that would, no doubt, like to have those rewards for themselves.

So even if rebel forces succeed under the banner of an essentially democratic revolution in overthrowing Col. Muammar el-Qaddafi, and regardless of whether Libya’s next leader arises from a democracy movement, at some point he is likely to consider political oppression as a survival strategy that helps hold back all his competitors.

For this and other reasons, research in economics and political science has found that democracy’s advances are few in oil-rich countries. Prof. Robert Barro of Harvard found that countries with relatively large net oil exports were less likely to have a democratic national government. Prof. Michael Ross of the University of California, Los Angeles, also found that effect.

Citizens of rich countries like democracy and like to use a lot of energy, so they generally import a lot of oil. The Barro and Ross results are sometimes questioned on the basis that oil exports are a symptom rather than a cause of a country’s political and economic situation.

This is one reason that Prof. Kevin Tsui of Clemson (my former student at the University of Chicago) examined oil reserves rather than net oil exports in a study published in The Economic Journal.

He found that democratization –- the process of moving to fair elections, allowing free speech, free political expression and so on -– was much less likely to occur after a country discovered significant oil reserves, regardless of how much oil the country chose to export.

Libya has other characteristics that make democracy unlikely. It is more Muslim that the average country in the world and more ethnically heterogeneous, and Professor Tsui has found both of these conditions to be associated with less democracy.

If Libya’s rebels are successful, no amount of Allied help will change the country’s location or its basic economics. Nor would it change Libya’s demographics, though perhaps a post-Qaddafi Libya would consist of multiple countries, each more homogeneous than the unified Libya was.

The Allied intervention will not bring Libya peace in the short term, and will not bring democracy in the long term as long as Libya has valuable oil in the ground.

Real Estate Crisis? It Depends on Supply

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Real estate’s future can often be understood by closely watching the supply of residential and commercial buildings.

In early 2009, employment and gross domestic product were dropping sharply, and real estate values had plummeted from their highs in 2006. The housing market was already in crisis, so it felt right to expect the commercial real estate market to follow.

Nouriel Roubini predicted, “More than 700 banks could fail as a result of their exposure to commercial real estate.” Elizabeth Warren later reported, “There is a commercial real estate crisis on the horizon.”

And journalists frequently referred to a looming commercial real estate crisis.

But none of this commentary noted how the supply situation in commercial real estate was drastically different than it was in housing.

By 2008, it was clear that too many homes were built for the market to bear. But the four-to-five-year boom in housing construction had taken resources away from commercial building, holding down the inventory of structures that would be available for business use.

With commercial structures in relatively short supply, I concluded in early 2009 that there would probably not be a commercial real estate crisis creating waves of bank failures.

My conclusion was greeted with much skepticism (one example was Salon’s article on “The NYT’s Chicago Economist: Wrong Again,” insisting that warning of a commercial real estate meltdown was part of “reliable economy-watching”). Paul Krugman also weighed in.

More than two years have passed, and we no longer hear much about the once-imminent crisis.

Professor Roubini still thinks that a commercial real estate crisis is ahead. Others said the crisis was averted. Either way, it is now recognized that the relatively low supply of commercial real estate made a big difference.

In order to assess the likelihood that the housing sector double dips – that is, has another crisis something like the one in 2008 – it helps to look at the supply.

The black line in the chart below shows an index of housing inventory per person at the end of each year from 1990 to 2011 (with housing inventory measured as square footage, adjusted for quality; 2011 is a forecast). Housing supply almost always increases faster than population, but the housing boom of 2002-6 stood out compared with the other years in terms of the relative rate of housing construction.

By 2007, housing supply was well above the trend of the 1990s (before the housing boom). If you think that a rational market would have more or less followed that 1990s trend, then the excess supply in 2007 meant that housing prices had to come down.

Of course, housing prices did come down a lot in 2007 and 2008, and the housing supply stopped growing. By the end of 2010 – the second-to-last observation shown in the chart – housing supply had fully returned to the trend of the 1990s.

Because the pace of housing construction continues to be slow, it looks as if housing supply will be significantly below trend by the end of this year.

These supply results tell us something about the future of housing prices. Those prices depend on demand, too, but as long as housing demand is near or above the preboom trend, it looks as though housing prices are low enough already.

Part of the inventories of housing and commercial property sit vacant, but those vacancies are largely part of a slow economic recovery and the difficult task of dividing property losses from previous years among homeowners, landlords, banks and commercial tenants.

With the slow pace of new construction, neither the housing nor commercial real estate markets can any longer be characterized as having supply that significantly exceeds the fundamentals of demand.

Why the Big Deal About Consumer Spending?

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Economic commentary makes a big deal out of consumer spending, but with little explanation. The many facets of consumer spending are confusing, and public policy often ends up treating the symptoms rather than curing the disease.

Both Republican and Democrat politicians tout their economic policies as ways to put money in the hands of consumers. Unemployment insurance, for example, helps people who are unemployed, of course, but it is also purported to benefit employed people because the unemployment benefits received are spent elsewhere in the economy.

Much of the debate about President Bush’s 2008 tax rebate centered on whether taxpayers would spend it, rather than invest or save it.

But a person receiving money from the government has to do something with the it. And policymakers like to tout investment as healthy for the economy, too. So isn’t investment just as good as spending? Don’t we admire the thrifty more than the spendthrifty?In order to answer these questions, we need to know whether consumer spending has a causal influence on the wider economy – as politicians often suggest – or whether it is a barometer of economic efficiency.

Journalists and commentators often note that consumer spending is more than 80 percent of private-sector spending and more than two-thirds of all spending. Thus, at first glance, it would seem that inducing a person to spend would have a larger impact on gross domestic product than inducing that person to invest.

However, the size of the consumption sector is not evidence of its potency, because any one dollar is necessarily a smaller share of consumer spending than it would be as a share of investment. One dollar either has a larger effect on the smaller investment sector or a smaller effect on the larger consumption sector – the effect on the total economy could well be the same by either route.

Regardless of whether consumer spending stimulates the wider economy, economists generally agree that it is an excellent barometer of the economy. Soviet-style economies sometimes achieved high levels of production but could never be considered successful without permitting high levels of consumer spending.

Consumers tend to spend more when they expect their futures to be successful and tend to tighten their belts when bad times are on the horizon. Consumers vary in terms of where they live, their occupations, their expectations and their spending patterns.

Aggregate consumer spending is a kind of referendum among many different people, and we can tell from the changes in the aggregate whether spending increases outweighed spending decreases.

In this view, a consumer spending drop is a symptom of problems ahead, even if it does not contribute further to the disease.

The distribution of wealth and saving is even more unequal than the distribution of consumer spending; more people are consumers than are investors. For politicians seeking voting majorities, this alone may be a reason why they want to see more money in the hands of consumers rather than in the hands of the relatively small group of investors. But this does not mean that consumer spending stimulates the economy, just that it stimulus incumbents’ re-election.

Nevertheless, Keynesian economists continue to insist that consumer spending is more than a barometer of the economy — that consumer spending is a driver of the economy, and that right now it is a problem for our country every time a person shifts spending away from consumer goods and toward saving.

Regardless of whether Keynesians are correct, they often do not explain themselves. In a way, they agree with me that consumer spending is not the root cause of recessions, because they believe that the real problem is deflation – the tendency for wages, the prices of consumer goods and the prices of investment goods to fall rather than rise – and that deflation is the result of consumers’ belt-tightening.

In the Keynesian view, large sectors of the economy accidentally fail to keep pace with deflation, so wages and prices there end up being too high, compared with wages and prices elsewhere in the economy (or compared with wages and prices expected in the future). The sectors with sticky prices have trouble selling their goods (customers view the goods as too expensive) and workers in sectors with sticky wages have trouble finding a job (potential employers view the workers as too expensive).

Wages and prices are measured in units of money – how many dollar bills or debits to one’s checking account it takes to buy something. So deflation is equivalently a rise in the relative value of money, checking accounts and other liquid guaranteed financial assets (hereafter, I refer to the three as money).

Assuming that deflation is the root problem, Keynesians emphasize consumer spending because they assume that a consumer who doesn’t spend is a consumer who tries to add to her or his holdings of money. With more demand for money, money becomes more valuable and nonfinancial goods and services become less valuable – deflation.

Conversely, when a person is willing to part with her or his money to purchase consumer goods, that reduces the value of money and raises the value of the consumer goods – inflation.

That’s why Keynesians like it when (during a recession) the government borrows money from investors to, say, give funds to the unemployed. They assume that the investors would have held on to money if they had not lent it to the government, and they assume that the unemployed will not hold on to the money they receive in the form of unemployment insurance.

Putting aside the fact that redistribution from investors to the unemployed is a rather indirect means of reducing the relative value of money (that is, creating inflation), Keynesians have assumed, rather than proved, that investors finance their lending to the government out of their money holdings rather than by reducing their purchases of investment goods.

If it were even partly the latter, then the borrow-to-finance-unemployment-benefits policy could itself create deflation as it puts downward pressure on the prices of investment goods.

Regardless of whether you agree with the Keynesian assumptions, the facts fail to confirm their emphasis on consumer spending as a driver of the economy. When the latest recession got under way, hiring fell much more than consumer spending.

More recently, we have seen real consumer spending reach all-time highs, while employment remains lower than it was 10 years ago. All of this is consistent with my view that consumer spending reacted to a bad labor market and rejects the assertion that a consumer spending recovery would bring back the labor market.

Public policy needs to help cure the labor market disease, not merely treat the consumer sector symptoms.

Do Government Spending Cuts Reduce Growth?

We can test this proposition using the stimulus wind-down over the past couple of quarters. The blue squares in the chart below are measures of actual inflation-adjusted government spending growth and real GDP growth. It looks like the economy grew more as government spending was cut after the stimulus peaked.

(For an explanation of the red and green hypotheticals shown in the chart, click here).

You might argue that government spending cut back only when the economy began to recover for other reasons, but I see two problems with that argument:

• the wind-down of the ARRA "stimulus" was set two years ago when the law was passed. By what miracle did the stimulus designers get the timing exactly correct, while at the same time were wildly off on how deep the recession would ultimately prove to be?
  
• If you believe that government spending really does increase GDP, what exactly is helped the economy endure the end-of-stimulus spending cuts by actually growing faster that it did a year ago when stimulus spending was peaking?
  
  

Where's the Stimulus Hangover?

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Last week’s final report on gross domestic product for 2010 provides a fresh opportunity to evaluate the stimulus law passed two years ago. The data and economic reasoning suggest that the effect of government spending on G.D.P. was minimal at best.

As planned, almost all of the tax cuts and public spending increases from the American Recovery and Reinvestment Act of 2009 are finished. The Obama administration and its supporters promised that the fiscal stimulus law would create or save more than three million jobs by now. Their stated intention was to provide government spending while the economy was weak, then end the extra spending as the economy recovered.

But instead of adding jobs, employment is now about two million below what it was when the law was passed in February 2009.

Some of us think that the fiscal stimulus made a bad situation worse, and that employment would have grown, or fallen less, if the stimulus law had not been passed. The Obama administration contends that, apart from the stimulus law, the economy was in worse shape than anyone expected, and that the law kept the employment drop to two million, rather than a potential drop of more than five million.

While the increase in the stimulus by design coincided with economic weakness, the stimulus decline did not coincide with economic strength. Unemployment rates remained high, and employment, home prices and the Federal funds rate remained low as stimulus spending was winding down (as this profile of stimulus spending shows; note that we are now in the middle of fiscal year 2011).

If Keynesian stimulus advocates are correct, economic growth should have been sharply reduced when stimulus spending slowed.

I use real G.D.P. results from the Bureau of Economic Analysis to measure actual economic growth through the end of 2010. In order to compare the results with the Keynesian theory, I assume a government spending multiplier of 1.5, as the Obama administration did when it projected the impact of the law.

Such a multiplier means that each additional dollar in government spending adds $1.50 to G.D.P., and each dollar subtracted from government spending subtracts $1.50 from G.D.P.

Because we know that the economy would have been weak in the first few quarters of the stimulus regardless of the law, I do not begin the measurement until the fourth quarter of 2009, when the president’s Council of Economic Advisers declared that the stimulus law had successfully started a slow recovery.

If the advisers were right, economic growth should have increased further when government spending grew still faster in the next couple of quarters, and then economic growth should have been less as government spending grew more slowly later in 2010.

I have illustrated the Keynesian-multiplier-1.5 as a red line in the chart below, and the actual results as blue squares. The blue square at the end of the red line is the data for the fourth quarter of 2009. If the multiplier of 1.5 held up, all of the data for the subsequent quarters should have appeared on the red line. (The quarters represented by the squares are not in chronological order.)

Instead, actual G.D.P. growth ended up below the red line and, more important, the quarters with more government spending growth tend to be those with less G.D.P. growth.

Stimulus advocates lament that the stimulus law was too small and was significantly offset by shrinking state and local government spending. But my chart measures total government spending at all levels.

We can see from the chart that real government spending did in fact grow rapidly at times and grow slowly at other times: the actual growth rates range from less than 1 percent per year to more than 7 percent per year.

The red line shows that the range was wide enough to, according to the 1.5 multiplier, make G.D.P. growth rates of almost 9 percent per year (technical note: as drawn, the red line does not have a slope of 1.5 because, in terms of growth rates, the slope is the product of 1.5 and the ratio of government spending to G.D.P.).

A number of Keynesians outside the Obama administration would distinguish government spending on “transfers to individuals” from government spending on goods and services (among other things, government spending on goods and services is automatically counted in G.D.P.; transfers are not).

My chart’s green line shows an alternate Keynesian hypothetical based on a multiplier of 0.75, which might represent a smaller multiplier for transfers.

(Because the Obama administration’s original projection made no distinction between purchases and transfers to individuals – even though it knew that much federal spending would be the latter and some federal grants to state and local governments would allow those governments to make transfers – the 1.5 hypothetical is the appropriate one for evaluating their promises of stimulus results, even it is not appropriate for evaluating other Keynesian theories).

The blue squares showing actual results for our economy do not fit anywhere in the cone formed by the two Keynesian hypotheticals, suggesting that, contrary to the Keynesian promises, the stimulus law did not noticeably increase G.D.P. and might even decrease it.

After all, the stimulus spending penalized success, since its benefits — for example, extending unemployment insurance — were aimed at people and businesses with low incomes, and not at those who were working and/or achieving a certain income level. So it would be no surprise if the result was to keep incomes below what they would have been — as in other cases, a counterproductive result of a well-intentioned program.

Perhaps you think that government spending does its stimulation with a lag, but the Keynesian theories do not fit the lagged data any better. The chart below is the same as the one above except that government spending growth is measured in the quarter prior to the G.D.P. growth.

Again, the data fail to fall in the cone predicted by the 0.75 to 1.5 range of Keynesian multipliers. (Further variations on these charts provide no better results).

Recent G.D.P. growth results are just one way to attempt to measure the amount of stimulus the stimulus act provided. But the longer we go without any vivid empirical demonstration of the stimulus law’s potency, the more we are driven either to reject Keynesian theory or to accept it solely as a matter of faith.

Stimulus Estimates: Sensitivity Analysis

Tomorrow I will post an article about government spending and GDP growth during 2010. That article has two charts showing Keynesian projections for economic growth, using 2009 Q4 growth as a benchmark.

The article briefly notes that the benchmark doesn't really matter for the conclusion, because the data show a clear negative correlation between government spending growth and GDP growth. But the charts below help show more vividly that the benchmark does not matter, by using an alternate normalization -- the average government spending and GDP growth during the period shown. All of this will make more sense when the original article is posted Wed March 2.