Good News, but Where are the Jobs?

"America's business productivity soared in the second quarter of 2003 and new claims for unemployment benefits dropped to a six-month low last week, a double dose of good news as the economy tries to get back to full throttle." Productivity in the second quarter grew at an annualized rate of 5.7%, which is extremely high by historical standards (note that the number is still subject to revision, but even if it's cut by 1/3, it's still very high).

New application for jobless benefits stayed below 400,000 per week for the third consecutive week. However, a slowing of the rate of layoffs is not the same as creating more jobs (recall that the recent drop in unemployment from 6.4% to 6.2% was triggered by people abandoning their job search, not by people finding new jobs; see also Matt's post below). But the productivity growth in the second quarter, if it reflects a trend and not an aberration, is good news in the long run: it will mean that when the economy starts expanding, inflation will not be a major concern.

On the other hand, excess capacity and the accompanying downward pressure on prices have been a major business problem of late. Because of that excess capacity, it would not be difficult for measured productivity (output divided by hours of labor) to increase quite a bit in the short run without reflecting what is typically thought to cause long run productivity growth--new, more efficient, technologies and processes (think 1990s). Time will tell. At the least, the latest news is not bad news; how good it is unknown.

AB

Even the Conservative Economist

The current Economist has an interesting piece, Hidden dangers: The American government's accounts look about as reliable as Enron's (article here--subscription required). The story reports on a study by two AEI economists, Jagadeesh Gokhale and Kent Smetters, that uses two new measures of how sustainable deficits are. One of them is the Generational Imbalance (GI) index, which measures (in net present value) how much society will spend on the current generation over their lifetimes versus how much society will collect from that generation over their lifetimes. They estimate that Medicare alone represents a transfer of $20 trillion (1.7 times GDP in today's dollars) from future generations to the current one!

This seemed a bit high at first, so I took a look at the 2003 Status of the Social Security and Medicare Programs, where I found this graph:

I didn't run the numbers, but based on this the Gokhale and Smetters number seems plausible. Not surprisingly, the AEI economists use their result to argue against expanding Medicare and Social Security benefits (a position I agree with, unless taxes are raised or other spending cut to pay for them). On the other hand, exacerbating the transfer from "the children" to the current generation via massive tax cuts and the accompanying deficits seems like an equally bad idea. Oh wait, I forgot, the solution is trivial: use more tax cuts to increase revenue--we better get taxes down and pronto!

Back to The Economist's assessment of the situation:

As the late Herbert Stein, a noted economist, once said, "If something cannot go on forever, it will stop." One way or another, America's budget gap will have to be closed. The question is, will it be done responsibly, by coming clean about the hidden liabilities now and taking the necessary, if painful, steps to deal with them? Or will the top management, like Enron's, stave off admitting the true state of America's finances until it is forced to do so by some spectacular collapse?

AB

Jobless Recovery

Via Ruminate this, check out John Andrew, who was recently laid off and is now using his free time to shadow the Bush Economic Crew.

AB