Putting America’s Recovery to Work

Laura Tyson

FEB 12, 2014
Newsart for Putting America’s Recovery to Work

BERKELEY America’s economy grew much more rapidly than expected in 2013 and appears poised to strengthen further this year. But there is still considerable slack in the labor market, and, as long as it persists, the gains from faster growth will continue to be concentrated at the top of the income distribution, as they have been throughout the recovery.

According to recent BEA estimates, real (inflation-adjusted) GDP grew at a 2.7% average annual rate in 2013, compared to only 2% in 2012. Most forecasters – including the nonpartisan Congressional Budget Office, the so-called Blue Chip consensus, and the Federal Reservepredict that annual real growth will reach at least 2.8% in 2014.

Despite two recent lackluster employment reports, there are many reasons to expect that growth will accelerate in 2014. The headwinds buffeting the US recoveryimpaired household balance sheets, a depressed housing market, and government spending and employment cuts – are dissipating. Household debt has fallen to levels last seen in the early 1990’s, real household net worth has returned to its pre-recession peak, and residential investment as a share of GDP is rising.

Meanwhile, state and local-government budgets are improving, and the federal budget is on track to subtract only about 0.5% from GDP in 2014, compared to 1.75% in 2013. In a Congressional election year, another destabilizing showdown over the federal debt limit is unlikely.

Moreover, monetary policy is likely to remain accommodative, and inflation remains lower than expected. US Federal Reserve Chair Janet Yellen was a vocal co-architect of the Fed’s accommodative policy stance under the leadership of her predecessor, Ben Bernanke, so policy continuity is expected. Indeed, the Fed has reiterated its intention to hold the federal funds rate near zero well past the time that the unemployment rate falls below 6.5%, while gradually trimming its purchases of long-term assetsso-called quantitative easing – by $10 billion a month.

Meanwhile, private spending grew 3.9% year on year in 2013, the strongest rate in a decade, and the outlook for 2014 is promising. Improving household balance sheets imply stronger consumer sentiment. Real personal-consumption spending rose at a 2.3% annual rate in 2013, up from 2% in 2011 and 2012.

Stronger consumer spending, along with record-high corporate profits, should boost investment spending further this year, as will re-shoring of economic activity and an improving trade balance, owing to a decline in energy and labor costs in the US. Indeed, shale energy and big-data analytics, two areas in which the US has a strong competitive edge, could be significant supply-sidegame changers” for growth.

Nonetheless, the outlook for US workers is less sanguine and more uncertain. Despite stronger growth in 2013, net monthly job creation, at about 193,000, was only slightly above its 2012 level (186,000) and still below its pre-recession average of 200,000. Employment at the end of 2013 was still 1.1 million short of its pre-recession peak; regaining this peak requires 7.7 million more jobs, in addition to absorbing subsequent monthly entrants to the labor force.

In November 2013, monthly job openings topped four million for the first time since 2008. But the number of job seekers exceeded the number of openings in every industry. When the recession officially ended in June 2009, there were 6.2 unemployed workers for every job opening. In November, this ratio had fallen to 2.7, compared to 1.8 before the recession began (and just 1.1 in 2000).

When the recession hit, unemployment rates for workers at all education levels jumped, and they have yet to fall back to pre-recession levels. While the short-term unemployment rate (those unemployed for 26 weeks or less) has fallen back to its 2001-2007 pre-crisis average, the long-term unemployment rate remains higher than at any time since the measure was introduced in 1948. The long-term unemployed account for about 36% of total unemployment, down from nearly 46% in March 2011 but still far above the previous peak of 26% reached 30 years ago.

The long-term unemployed tend to be older – the number of unemployed workers aged 50-65 has doubled – and those who have been laid off from previous jobs. Faster economic growth and more job openings are less likely to benefit these workers: the longer they are unemployed, the more their skills become obsolete and the more their actual or perceived employability deteriorates.

Moreover, both the short-term and long-term unemployment rates underestimate the slack in the labor market caused by the significant and sustained decline in the labor-force participation rate (LFPR) since the recession began. In 2007, 66% of Americans were working or actively seeking work; today, that number stands at 63%, the lowest level since 1977.

If the LFPR had remained at its pre-recession high, the unemployment rate today would be nearly 12%. If it had stabilized when the unemployment rate peaked in October 2009, unemployment today would be over 9%.

A critical policy question is why the LFPR has continued to decline. Demography clearly plays a role: a larger share of the workforce is reaching retirement age, while the share of those aged 16-24 who are pursuing education is rising. But the recession triggered sudden and sustained declines in the LFPR across all age groups in response to weak demand and poor job prospects. A recent CBO analysis attributes about one-half of the decline in the LFPR from the end of 2007 to the end of 2013 to these cyclical factors, with the remainder explained by secular demographic trends.

As has been painfully obvious during the last several years, prolonged labor-market slack means falling real wages for most workers, with the negative effect intensifying as one moves down the wage distribution. By the same logic, stronger growth in 2014 and tightening labor markets should lead to healthier wage gains for the 70% of the workforce whose real wages have not yet returned to their pre-recession level.

But, as President Barack Obama argued in his recent State of the Union address, it will take more than faster economic growth for American workers to recover from the Great Recession. Extending unemployment benefits for the long-term jobless, combating the stigma against hiring them, creating more on-the-job training opportunities and apprenticeships, and raising the minimum wage are all essential steps toward a more equitable distribution of the recovery’s benefits.

Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.


The petrostate of America

The energy boom is good for America and the world. It would be nice if Barack Obama helped a bit

Feb 15th 2014


RISE early, work hard, strike oil.” The late oil baron J. Paul Getty’s formula for success is working rather well for America, which may already have surpassed Russia as the world’s largest producer of oil and gas (see article). By 2020 it should have overtaken Saudi Arabia as the largest pumper of oil, the more valuable fuel. By then the “fracking revolution—a clever way of extracting oil and gas from shale deposits—should have added 2-4% to American GDP and created twice as many jobs than carmaking provides today.

All this is a credit to American ingenuity. Commodities have been a mixed blessing for other countries. But this oil boom is earned: it owes less to geological luck than enterprise, ready finance and dazzling technology

America’s energy firms have invested in new ways of pumping out hydrocarbons that everyone knew were there but could not extract economically. The new oilfields in Texas and North Dakota resemble high-tech factories. “Directionaldrills guided by satellite technology bore miles down, turn, bore miles to the side and hit a target no bigger than a truck wheel. Thousands of gallons of water are then injected to open hairline cracks in the rock, and the oil and gas are sucked out.

From the point of view of the rest of the world, the new American petrostate is useful. Fracking provides a source of energy that is not only new but also relatively clean, cheap and without political strings. It should reduce the dependence on dirty fuels, such as coal, and extortionate suppliers, such as Russia. Moreover, fracking is unusually flexible. Setting up an oil rig in the Gulf of Mexico can take years. But America’s frackers can sink wells and start pumping within weeks. So if the oil price spikes, they drill more wells. If it falls, they let old ones run down. In theory, fracking should make future oil shocks less severe, because American producers can respond quickly.

Fracking all over the world

Some foreign-policy wonks argue that this dramatic change in America’s fortunes argues for a fundamental change in the country’s foreign policy. If America can produce its own oil, they argue, why waste so much blood and treasure policing the Middle East? Yet even if it were politically sensible for America to disengage from the worldwhich this newspaper does not believe it is—the economic logic is flawed. 

The price of oil depends on global supply and demand, so Middle Eastern producers will remain vital for the foreseeable future. It is in the superpower’s interest to keep Gulf sea lanes open (and not to invite China to do the job instead).

Although America’s foreign policy should not change, its energy policy should. Its ban on the export of crude oil, for instance, dating from the 1970s, was intended to secure supplies for American consumers. But its main effect is to hand a windfall to refiners, who buy oil cheaply and sell petrol at the global price. 

Barack Obama should lift it so that newly fracked oil can be sold wherever it makes the most cash. And he should approve the Keystone XL pipeline, which would carry oil from Canada’s tar sands to American refineries; an exhaustive official study has deemed the project environmentally sound.

America does not ban the export of natural gas, but it makes getting permits insanely slow. Fracking has made gas extraordinarily cheap in America. In Asia it sells for more than triple the price; in Europe, double. Even allowing for the hefty cost of liquefying it and shipping it, there are huge profits to be made from this spread. The main beneficiaries of the complicated export-permit regime are American petrochemical firms, which love cheap gas and lobby for it.

Mr Obama should ignore them. Gas exports could generate tankerloads of cash. To the extent that they displace coal, they would be good for the environment. And they could pay foreign-policy dividends, such as offering Europeans an alternative to Russian gas and so reducing Vladimir Putin’s power to bully his neighbours. Allowing exports might cause America’s domestic gas prices to rise a little, but it would also make American frackers pump more of it, cushioning the blow.

A world in which the leading petrostate is a liberal democracy has much to recommend it. But perhaps the biggest potential benefit of America’s energy boom is its example. Shale oil and gas deposits are common in many countries. In some they may be inaccessible, either because of geology or because of environmental fears: but in most they go unexploited because governments have not followed America’s example in granting mineral rights to individual landowners, so that the communities most disrupted by fracking are also enriched by it. Become a champion of a global fracking revolution, Mr Obama, and the world could look on America very differently.

February 12, 2014 4:16 pm

Yellen, tapering and a moribund G20

Interdependence cannot be wished away; rising world turbulence may yet exact a toll on the US

Janet Yellen©AP

So there you have it. The US Federal Reserve sets monetary policy to fit conditions in the US economy. If decisions taken by the Fed cause collateral damage elsewhere, well, tant pis. So much for global governance.

Janet Yellen was loud and clear in her testimony to Congress this week. In so far as the Fed’s policy of withdrawing monetary stimulus had spooked markets in emerging economies, the turbulence did not represent a “substantial risk to the US economic outlook”. Put this another way: the world’s most powerful central bank pays attention to what happens in China, India or Turkey only in so far as it washes back over the US.

In one respect, the Fed chairwoman was offering a statement of both the obvious and the politically prudent. The duty of the Fed is to promote the economic wellbeing of the US. Had Ms Yellen said it was tailoring its tapering programme to the wishes of policy makers in Beijing, Delhi or Ankara, her first appearance before Congress as chairwoman might have been her last. Members of the House of Representatives are not noted for their devotion to multilateralism.

The emerging economies take a different view. Raghuram Rajan, India’s central bank governor, has attacked the US for its apparent indifference to the global upheaval as rising states have been forced to raise interest rates in the face of Fed tapering. 

He has half a point: while the west headed into recession after the global financial crash, it was growth in the emerging world that kept the economic show on the road. Now that the US is recovering, it has returned to the old selfish ways.

The snag is that had Mr Rajan been in Ms Yellen’s seat he would have said much the same thing. Like the Fed, the Indian central bank sets interest rates to suit national economic conditions. The governor answers to Indian politicians. They would not applaud a policy framed to accommodate the concerns of central banks elsewhere.

I suspect that Mr Rajan would say the dollar’s position as the world’s reserve currency places a special responsibility on the Fed. But for as long as India, China and the rest remain jealous guardians of national sovereignty, asking the US to adopt a uniquely internationalist stance is futile.

There was a moment in the immediate aftermath of the global financial crash when governments from the advanced and rising states seemed ready to break the cycle of selfishness. In the early meetings of the Group of 20 nations, policy makers recognised their national interest in the mutual endeavour to prevent a slide into a 1930s style-recession.

It did not last. The passing of the immediate crisis has seen meetings of the G20 fall into the familiar pattern of such international gatherings: the responsibility to act in the wider global interest always belongs to someone else. None have been more jealous guardians of national prerogatives than the emerging economies.

The facts of economic interdependence cannot be wished away. At some point turbulence in the rising world may well exact a toll on the US; at which point, presumably, Ms Yellen could argue that countervailing action was in the US national interest. But this represents a strategy of waiting for the damage to be done. What a waste.

Less than two months in to 2014, parallels with events a century ago, when the first world war put an end to an earlier era of globalisation, are already wearing thin. In an eloquent speech in London the other day, Christine Lagarde, the managing director of the International Monetary Fund, suggested that policy makers should focus instead on another anniversary.

The 44 nations who gathered at Bretton Woods in 1944, Ms Lagarde observed in her BBC Dimbleby lecture, understood the connection between interdependence and collective action. The architects of the IMF and the World Bank looked beyond the deceptive lure of unvarnished sovereignty.

At this, the original multilateral moment, the representatives of 44 nations, Ms Lagarde recalled, “were determined to set a new course based on mutual trust and co-operation, on the principle that peace and prosperity flow from the font of co-operation, on the belief that the broad global interest trumps narrow self-interest”.

Now there’s a manifesto for the G20.

Copyright The Financial Times Limited 2014.

Heard on the Street

It's a Big, Bad World for America Inc.

By Justin Lahart

Feb. 12, 2014 4:44 p.m. ET

Trouble in emerging markets is unlikely to hurt the U.S. But America's companies may not be as lucky.

It has been a rough year so far for developing economies. Several, including Turkey, Argentina and South Africa, have seen sharp slides in their currencies. The Federal Reserve's reining in of its bond-buying program is causing fits elsewhere, and worries about capital flight have contributed to some central banks' recent decisions to raise interest rates. Signs that China's growth is softening, along with worries about the stability of the country's shadow-banking system, have added to the mix.

Although emerging-market woes have played a part in the drop in the U.S. stock market this year, worries they could cause serious financial-market problems in the U.S. have been subdued. Unlike the Mexican peso, Asian financial and Russian debt crises of the 1990s, banks' emerging-market exposures seem well managed. And investors have shied away from the types of heavily leveraged, multiple-country bets that led to the Fed-supervised bailout of Long-Term Capital Management in 1998. In her inaugural testimony as Fed chairwoman Tuesday, Janet Yellen said that the central bank isn't viewing the recent volatility in global financial markets as a threat to the U.S.

But while the possibility of financial-market contagion from emerging markets has lessened over the years, their role in the global economy has grown. Countries outside of the Organization for Economic Cooperation and Development nations that the World Bank classifies as high-income accounted for 61% of global gross domestic product, on a U.S. dollar basis, in 2012. That was up from 53% in 2000.

Precise numbers aren't available, but as emerging economies have grown, they have also become more vital to many large, public companies' businesses. General Electric, for example, made 34% of its sales outside of the U.S. and Europe in 2012 versus 17% in 2003. Caterpillar generated 36% of its total sales last year in Latin America and the Asian-Pacific region, compared with 21% in 2003. Countries outside of the U.S. and Europe accounted for 40% of Johnson & Johnson's  sales in 2013, up from 17% in 2003.

A broad set of data from the Commerce Department on U.S. multinationals' majority-owned foreign affiliates paints a similar picture. In 2011, countries outside of the high-income OECD members accounted for 34% of sales at U.S. multinationals' majority-owned foreign affiliates. That compared with 25% in 2000.

Emerging markets' role in companies' expansion plans has been even more pronounced. In 2011, countries outside of the OECD accounted for 42% of capital spending at multinationals' foreign affiliates, compared with 30% in 2000. In other words, not only do emerging markets now represent a greater share of sales, they are where companies have putting bigger stacks of their chips.

Given the pace of emerging markets' growth over the past decade, and the promise of what they may become, it isn't hard to see why U.S. companies have done this. But there is a risk that in chasing growth they, and their shareholders, have lost sight of just how volatile emerging market economies can be. This year may serve as a reminder.

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